Getting To Know Moving Averages
For those of you who have just been in the world of investing or trading, you must learn about basic things such as trends, candlestick patterns, chart patterns, support and resistance, and indicators.
It is not uncommon for a beginner who is still new to the world of trading to find the most “profitable” indicator for him to use when trading.
But there is no such indicator because what you get is according to your knowledge. You also have to combine various price action analyses instead of relying on indicators alone.
There are still some basic indicators that a beginner must know at the beginning of his trading journey because these indicators are primary indicators that even professional traders use.
The indicator is a moving average; this indicator is a primary indicator widely used by many traders, from beginner to professional traders.
Before you know what exponential moving averages are, you should first know the basics of moving averages.
Moving averages can be a powerful indicator if you can use them properly.
That’s because the MA is the simplest indicator among other technical indicators.
If the price moves up (uptrend), then the MA curve will move up as well, and otherwise, if the price goes down (downtrend), the MA curve will move downwards.
The moving average is a statistical indicator based on the price action of an instrument where the purpose of the moving average is to find out the price movement in a certain period and to know the support and resistance limits of an asset.
This indicator also helps clarify prices by eliminating price fluctuations that may be less relevant, all based on past price calculations.
This indicator results in forming an average price line for a certain period.
You can adjust your time-frame selection according to your trading plan, for example, 5 (1 week), 60 (3 months), and 120 (6 months) periods. The longer the period you use in trading, the slower the movement compared to the price.
And one thing you also need to know is that the use of this indicator is not to find out price movements that will occur in the future.
However, this indicator is only used to find out the current trend.
Moving Average vs Exponential Moving Average:
- You will learn the basic differences between moving averages and Exponential Moving Averages
- Learn how to apply moving averages in trading strategies
- Discover the advantages and disadvantages of using Moving averages and EMA
- Find out which indicator is best for you between MA vs EMA
The Difference Between Moving Averages
Two moving averages are most used by traders worldwide, both of which have their definitions if interpreted.
Simple Moving Average (SMA)
We will refer to this moving average if we mention moving averages. Yes, that is a simple moving average.
The simple moving average is an MA that uses the same calculation weight for each day in its application.
So, if you use MA 5, then the weight of the five-day calculation is the same. It means that the previous day and today have the same calculation weight in predicting price movements.
SMA uses historical data on highs, lows, open prices, and closing prices. This indicator is an indicator that traders usually use to determine when is the best time to open or close the position.
Besides that, you can get a lot of other data from simple SMA calculations, for example, support and resistance points, sell and buy, etc.
This SMA indicator is the default setting of the moving average.
Therefore, as mentioned above, if it is related to the MA, it will directly point to the SMA.
Exponential Moving Average (EMA)
The Exponential Moving indicator, or what we know as the EMA, is the second most popular indicator after SMA.
Now, unlike SMA, if one candlestick experiences a price spike, then the overall value of the SMA will rise and result in us getting less accurate signals.
However, using the EMA will get a more accurate signal because the EMA focuses more on the average price movement.
The EMA is more sensitive to recent momentum than the SMA.
This is all done to assist investors in responding to price changes that are happening more quickly so that you as a trader can be faster in making decisions.
This indicator also helps you as a trader to determine buying points.
And just like SMA, by using EMA, you can find support and resistance.
Then, if you look at the graph, what is the difference between the ordinary moving average and the exponential moving average?
Please take a look at the bitcoin stock chart below:
The EMA (yellow line) looks closer to the original price movement, and SMA (blue line) looks further away from the price movement.
So this is an implication that the EMA is focused on more recent or current moves.
Functions Of Moving Average And Exponential Moving Average
MA and EMA have the same function in their application in trading on various existing instruments, while these functions are:
Clarifying Or Smoothing Out Price Movements
Becoming an indicator that smoothes price movements, it is clear that the function of the MA or EMA is to detect the direction of the trend. theory is:
- If the moving average line tends to rise and is below the price movement, the trend is bullish.
- If the line from the moving average tends to fall and is below the price movement, then the trend is bearish.
- If the moving average line forms a simultaneous hill and valley pattern, the trend is experiencing a sideways consolidation.
Knowing The Trend Reversal
So you can find out the trend reversal point. You need to see if the asset’s price has broken through the moving average.
If it is successfully penetrated in the short-term MA period, the reversal may only occur in the short term.
And vice versa, if the long-term MA period is broken, the trend reversal is likely to occur in the long term.
Determine The Support And Resistance Levels Of An Asset Price
You can also use moving average indicators to reference psychological levels rather than support and resistance.
When the price approaches the moving average level, the price often bounces so that the moving average is like a wall of price.
How To Practically Use MA And EMA In Your Trading
Thus becoming the most popular indicator among traders in the world.
Like the function mentioned above, the way to use Moving average and Exponential moving average is the same.
There are several ways to use indicator moving averages, and here are the steps for using moving averages:
Plot Your Charts At 20 And 50 MA Or EMA
The first step you have to do is set the chart precisely with the correct moving average.
You can use the setting of two moving averages with periods of 20 and 50.
Only then can you wait for the price to move to the next stage, namely the crossover.
Wait For The Moving Average Crossover
If you have set the 20 and 50 MAs on the chart, you must wait for the asset price to go above the 20 and 50 MAs.
After that, you need to wait patiently for the MA crossovers, which will increase the weight that will be bullish.
It would be best to refer to the crossover to buy the asset you are eyeing. When the 20 MA crosses above the 50 MA limit, you can make a buying decision.
If the 20 MA crosses down and the 50 MA, you can make a selling decision.
But keep in mind that because it is prone to false breakouts, you can collect more evidence before opening a buy or selling a market position.
Because at this stage of the cross, the trader may not know whether the sentiment is strong enough to push the price up.
Place Stop Loss Below 50 MA
It is very important because you can see the trend going up after a crossover and repeated retests.
Usually, the price will cut the MA, correct the MA, and then bounce back to test the bullish strength.
So that you avoid significant losses and don’t want to miss the current opportunities, because the market often does false breakouts, don’t forget to set a stop loss.
Do A Trailing Stop To Maintain Profit
So that the profit you get is maximum and can continue to run, you can do a trailing stop.
Trailing stop is a method by increasing the stop loss above the price of your current position.
If the price has increased after the crossover, you will not miss the opportunity.
However, if the price does a false breakout, you have limited your losses.
Advantages And Disadvantages Of MA And EMA
Advantages Of MA
- Moving averages are suitable for estimating trading assets or commodities where demand data is stable (constant) or do not show fluctuations.
- The moving average method is easy to understand and use in forecasting (forecasting calculation) compared with forecasting using trendline analysis.
- The forecast results from the moving average are very stable.
- You will find it easier to avoid fake signals in the market, and this is because the movement of the moving average itself is very smooth.
Advantages Of EMA
- All the advantages are almost the same as the regular MA. Still, the difference is that the EMA is more sensitive to price movements because the EMA gives a heavier calculation weight in the last period.
- Suitable for use by aggressive traders who want to get profits faster.
Disadvantages Of MA
- MA is less accurate to reflect recent trend information.
- MA requires a lot of information in the past. So for its application, it is also used for trading for long periods such as weekly or monthly.
- This indicator is very slow in responding to changes in information that often occur in the market.
Disadvantages Of EMA
- EMA is very sensitive to price movements. Therefore the potential for fake signals in the market is very possible.
Conclusion Of Who Is The Best Between MA Vs EMA
Moving average is a technical indicator that calculates the price range or closing price, then divided by the number of periods.
Traders often use MA to show price trends in a certain period.
If the MA is pointing up, this is a sign that the price is rising.
And vice versa, if the MA is pointing downwards, then this is a sign that the price trend is declining.
The EMA has the same function as the MA, but the EMA is more sensitive to price movements than the MA.
So the answer to which is the best of the two is up to you. If you want an indicator that reacts more quickly to price movements, for example, at the beginning of a trend, the EMA is the right choice for you to use.
The drawback of EMA is that the signals given are sometimes less accurate when prices are consolidating, aka sideways.
As mentioned above, this indicator reacts quickly to price changes.
You may think that there is a signal that is formed when in fact, it is only a price spike that occurs.
But if you need an indicator to read the current trend’s direction, then the MA with a long period is the right choice.
Although MA is arguably slow in reacting to price changes, you can avoid price spikes by which you may be able to avoid false signals.
The disadvantage of MA may be that you can miss important moments when a strong trend is forming, which can provide many advantages if you enter early.
And you need to know some traders use MA and EMA together.
This is useful for getting a broader picture of what is happening in the market.
MA with a long period is used to read the direction of the price trend, and then the EMA is used to find the right time to enter the market.
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