What is a moving average trading? They are sometimes called price smoothies. That’s because a moving average is simply a method to smooth out the price action over time. When you say moving average, this means that you are making use of the average closing price of a certain currency for the past “x” months or for the past periods.
Just like other price indicators, the moving average indicator also helps in predicting the future prices. As you look at the charts and see the slope of the moving average, you’ll get a hint of where the price will go. Thus, you’ll be able to make predictions on what the price will be. Let’s take a look at moving averages in greater detail.
Early, we mentioned that moving averages smooth out the price action. Now there are certain levels of smoothness and these are categorized into the different types of moving averages. There are those that have smoother moving averages meaning they are slower to react to price movement. On the other hand, the crooked the moving average is, the quicker it is to react to price changes. Let’s take a look at the different types of moving averages and see how these are calculated.
- Simple Moving Average or SMA is the simplest form of moving average, as the name implies. To be able to compute the Simple Moving Average, you just have to get the sum of the closing prices for the last couple of periods that you are calculating and then divide it by the number of periods. Simply put, it’s just like getting the average of something. For example, you want to calculate the Simple Moving Average for the last 5 periods, say 5 days. So what you do is total the closing prices for each day and then divide it by the number 5. If you want to calculate the SMA for the past 10 hours, then get the closing prices per hour for the last 10 hours and sum them up. Then, divide the sum by 10. It’s that easy to get the Simple Moving Average!
- Now the next type of moving average is the EMA or Exponential Moving Average. This one caters to the one single major flaw of SMA or Simple Moving Average – spikes. What if in a 10 day period, the closing prices are going up? Then the average will go up as well. However, according to the calculation for the SMA, if on the second day, the price closes at a lower price as compared to the first day but then goes up on the third day up to the tenth day then the average is lower than the previous example. This means that the Simply Moving Average becomes lower and will give you a notion that the price is going down even if it was just for the second day. EMA takes that notion away. With EMA, the emphasis is more of the last few days of the period.
What is a moving average trading? They are sometimes called price smoothies. That’s because a moving average is simply a method to smooth out the price action over time. When you say moving average, this means that you are making use of the average closing price of a certain currency for the past “x” months or for the past periods.
Just like other price indicators, the moving average indicator also helps in predicting the future prices. As you look at the charts and see the slope of the moving average, you’ll get a hint of where the price will go. Thus, you’ll be able to make predictions on what the price will be. Let’s take a look at moving averages in greater detail.
Early, we mentioned that moving averages smooth out the price action. Now there are certain levels of smoothness and these are categorized into the different types of moving averages. There are those that have smoother moving averages meaning they are slower to react to price movement. On the other hand, the crooked the moving average is, the quicker it is to react to price changes. Let’s take a look at the different types of moving averages and see how these are calculated.
- Simple Moving Average or SMA is the simplest form of moving average, as the name implies. To be able to compute the Simple Moving Average, you just have to get the sum of the closing prices for the last couple of periods that you are calculating and then divide it by the number of periods. Simply put, it’s just like getting the average of something. For example, you want to calculate the Simple Moving Average for the last 5 periods, say 5 days. So what you do is total the closing prices for each day and then divide it by the number 5. If you want to calculate the SMA for the past 10 hours, then get the closing prices per hour for the last 10 hours and sum them up. Then, divide the sum by 10. It’s that easy to get the Simple Moving Average!
- Now the next type of moving average is the EMA or Exponential Moving Average. This one caters to the one single major flaw of SMA or Simple Moving Average – spikes. What if in a 10 day period, the closing prices are going up? Then the average will go up as well. However, according to the calculation for the SMA, if on the second day, the price closes at a lower price as compared to the first day but then goes up on the third day up to the tenth day then the average is lower than the previous example. This means that the Simply Moving Average becomes lower and will give you a notion that the price is going down even if it was just for the second day. EMA takes that notion away. With EMA, the emphasis is more of the last few days of the period.
