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Moving Average MA is a price based, lagging or reactive indicator that displays the average price of a security over a set period of time. A Moving Average is a good way to gauge momentum as well as to confirm trends , and define areas of support and resistance. Noise is made up of fluctuations of both price and volume. Because a Moving Average is a lagging indicator and reacts to events that have already happened, it is not used as a predictive indicator but rather an interpretive one, used for confirmations and analysis.
There are a few different types of Moving Averages which all take the same basic premise and add a variation. Moving Averages visualize the average price of a financial instrument over a specified period of time. However, there are a few different types of moving averages. They typically differ in the way that different data points are weighted or given significance.
Simple Moving Average is an unweighted Moving Average. This means that each day in the data set has equal importance and is weighted equally. As each new day ends, the oldest data point is dropped and the newest one is added to the beginning. Each point within the period is assigned a multiplier largest multiplier for the newest data point and then descends in order which changes the weight or significance of that particular data point.
Then, just like the SMA, once a new data point is added to the beginning, the oldest data point is thrown out. The major difference with the EMA is that old data points never leave the average. To clarify, old data points retain a multiplier albeit declining to almost nothing even if they are outside of the selected data series length.
Moving Averages takes a set of data closing prices over a specified time period and outputs their average price. Now, unlike an oscillator , Moving Averages are not restricted to a number within a band or a set range of numbers. The MA can move right along with price. The timeframes or periods used can vary quite significantly depending on the type of technical analysis being done.
One fact that most always be remembered however, is that Moving Averages have lag inherently built into them. What this means is actually pretty simple. The longer the timeframe being used, the more lag there will be. Likewise, the shorter the timeframe, the less lag there will be.
Basically, Moving averages with shorter timeframes tend to stay close to prices and will move right after prices move. Typically any period under 20 days would be considered short term, anything between 20 and 60 would be medium term and of course anything longer than 60 days would be viewed as long term. While all the different types of Moving Averages are rather similar, they do have some differences that the trader should be aware of. However, since the SMA gives an equal weighting to all data points, no matter how recent, the SMA has a much closer relationship to areas of significance such as traditional Support and Resistance.
Unless otherwise specified, these indicators can be considered interchangeable in terms of the governing principles behind their basic uses. Using a Moving Average to confirm a trend in price is really one of the most basic, yet effecting ways of using the indicator.
This is what makes a Moving Average such a good technical analysis tool for trend confirmations. Because of the large amounts of data considered when calculating a Long-Term Moving Average, it takes a considerable amount of movement in the market to cause the MA to change its course.
A Long-Term MA is not very susceptible to rapid price changes in regards to the overall trend. Another fairly basic use for Moving Averages is identifying areas of support and resistance. Generally speaking, Moving averages can provide support in an uptrend and also they can provide resistance in a downtrend. While this can work for shorter term periods 20 days or less , the support and resistance provided by Moving Averages, can become even more readily apparent in longer term situations.
Crossovers require the use of two Moving Averages of varying length on the same chart. The two Moving averages should be of two different term lengths. If you take the two Moving Averages setup that was discussed in the previous section and add in the third element of price, there is another type of setup called a Price Crossover. With a Price Crossover you start with two Moving Averages of different term lengths just like with the previously mentioned Crossover. You basically use the longer term Moving Average to confirm long term trend.
The signals then occur when Price crosses above or below the shorter term Moving Average going in the same direction of the main, longer term trend. An experienced technical analyst will know that they should be careful when using Moving Averages Just like with any indicator. There is no doubt about the fact that they are trend identifiers.
That can be quite a valuable bit of information. However, it is important to always be aware that they are lagging or reactive indicators. Moving Averages will never be on the cutting edge when it comes to predicting market moves. What they can do though, is just like many other indicators that have withstood the test of time, provide an added level of confidence to a trading strategy or system. When used in conjunction with more active indicators, you can at least be sure that in regards to the long term trend, you are looking to trade in the correct direction.
Changing this number will move the Moving Average either Forwards or Backwards relative to the current market. Can toggle the visibility of the MA as well as the visibility of a price line showing the actual current value of the MA. Can also select the MA's color, line thickness and line style. Toggles the visibility of the indicator's name and settings in the upper left hand corner of the chart. Is similar to the SMA except it adds a weight multiplier to each period. There are three steps to calculate the EMA.