Recently we have realized that, together with the content news that we publish every week, we have missed publishing more educational content for those who have just joined the wonderful world of investments. So we have decided to start launching new posts in which we are going to provide training in trading related to tools for the technical analysis to allow new recruits to learn how to use technical indicators and much more. Today we are launching this trading training talking about moving averages and how to take advantage of them efficiently.
What are moving averages?路♂️
A moving average is a calculated value of an arithmetic average of the price over a specific period of time. That is, the function of a moving average is basically to smooth out price fluctuations in order to see beyond price variations that may be insignificant. This way, we can see the long-term trend that may differ greatly from what we see in the short term.
The simple moving average (blue line) and the exponential moving average (yellow line) are the most used by investors.
It should be noted that moving averages are made up of data that we have collected from the past, that is, it is a delayed indicator because it is composed based on past data. Changes in moving averages will occur after the price of the asset in question has already started to move. For this reason, moving averages serve as a trend confirmation tool.
What do moving averages contribute to our trading training?樂
Moving averages are used in technical analysis to help us identify long-term trends. At first it may seem like an odyssey to try to define where the price of an asset can go at a glance. That is why moving averages can help us detect, for example, when an asset is about to enter a trend or when it is about to exit it. We have 4 situations in which moving averages can help us define where the market is going:
1. The market is in a trend.
When we detect that the price is quite far from the moving average, it is an indication that the price is in a consolidated trend given the distance between the price quote and the moving average. If we see that the price is far away with the moving average heading upwards, we are facing an bullish trend. If, on the other hand, we see how the price is also far from the moving average but in this case the average is heading downwards, we are in a bearish trend.
In the following graph we can see how the price of oil remained in an upward trend during the first quarter of the year.
2. A trend losing strength.
When we see that the price of an asset begins to approach the moving average, reducing the notable distance that we saw previously, it is an indication that the current trend within that asset is beginning to lose strength. Remember that, when collecting past data, these losses of strength in the trend can also play tricks on us. It may seem that the price of an asset begins to stalk the moving average and then only relies on it to gain strength and continue immersed in that trend.
As we see in the chart above, Bitcoin was in an uptrend when we gradually saw an exhaustion of the trend through the downward slope of the moving average.
3. The lateralization of the price of an asset.
Just like human beings, asset prices will not always have a clearly defined trend that is completely visible. It may sometimes test the ground by oscillating the price near the moving averages due to indecision within the market. These are the crucial moments to be able to detect where the price of an asset could go.
When we see that the price of an asset is moving in step with the moving average, it tells us that we are close to a possible trend change.
4. Bounces or breaking points.
Apart from being useful for defining a trend, this type of indicator is useful in our trading training to be able to detect rebound or breakout points in the price of an asset. The price usually respects the long-term moving averages, where they usually make stops or breaks that we can take advantage of to enter trend changes. For example, if the price breaks the moving average strongly, we will most likely see a reversal of the current trend. If, on the other hand, we see how the price is bouncing strongly on a moving average, it can most likely be a stopping point and the current trend continues.
Rebound or breakout points help us identify possible trend reversals.
Types of moving averages.
To try to make this trading training as light as possible, we are going to focus on two moving averages that will be very useful to analyze our asset portfolio:
Simple moving average (MA).
The simple moving average (better known as MA or SMA) is the moving average that is made up of the closing prices of the asset in question during a certain period of time. For example, if we want to calculate the simple moving average of 200 periods, we only have to add the closing price of the last 200 days and then divide them by 200.
The 200-period moving average allows us to have a reference point for the trend of an asset.
Depending on the temporality that we are going to measure, the configurations may vary a little. To measure long-term temporalities, the periods where we can achieve the best results are levels such as 100, 150 or 200. To measure medium-term temporalities, the most effective is to use periods that range between 20 and 100 periods, and finally to short temporalities, the most optimal is that they range between 1 and 20 periods.
Exponential moving average (EMA).
The exponential moving average (EMA) is a type of moving average that assigns a different weight to each price. With the calculation of the EMAs, the most recent prices are favored by giving them greater weight. This reduces the weight of old prices on the calculation as time progresses. The main difference between simple moving averages and exponential moving averages is the way prices are averaged. The simple moving average measures the average in the same way for all prices, while the exponential favors the most recent prices so as not to be left behind with data that is far from present reality.
The exponential moving average gives more weight to the most recent prices to give us an average with more accurate data.
Is there a strategy to use moving averages?
For your fortune; The answer is yes. We are going to teach you 3 strategies with which you can use moving averages to detect price movements and take advantage of them to generate profits:
1. Crossover of the price and a moving average.
When we detect a crossing between the price and a moving average, the direction in which said crossing has been made (whether bullish or bearish) can tell us where the price will go during the following periods. At the same time, as we have explained previously, when the price is below or above said moving average, it also indicates the current trend in the asset in question.
The price crossing above an average gives us a good buy signal.
2. Crossover of two moving averages.
In the same way that we have seen with the crossing between the price and a moving average, average crossings can also give us a reference of the future movements that may occur. When we see a crossing of a fast moving average (for example, a 50 period MA) above a slow moving average (a 200 period MA) we can interpret it as a buy signal, better known as the golden cross If, on the other hand, we see the fast moving average descend below the slow moving average, we can interpret it as a sell signal, better known as a death crossing.
The crossing of averages gives us signals of a possible movement in the direction of the crossing.
3. Price slippage between two moving averages.
The third and last strategy that we bring you with moving averages is the sliding of the price between two averages. It is enough to look at the moment that we visualize a gap between the two averages along with a lurking price on one of the two. Next, we observe how the price moves near one of the averages. If we see that the price breaks one of the moving averages, it is enough to take advantage of the journey towards the other moving average, whether upward or downward.
We can take advantage of the sliding between to perform simple operations.
Conclusions about moving averages.類
As we have been commenting throughout this training in trading on moving averages, we have to remember that moving averages act with a delay, based on past data. Like any other type of indicator, moving averages guide us about the possible direction of the price, but at no time do they assure us of a 100% accurate prediction of the movement. The most optimal parameters to take advantage of moving averages are 50 periods for fast averages and 200 periods for long averages. It should be noted that the 200-period average usually acts as support or resistance in prices, so we must look at the distance between the average and the price to speculate on the future direction of the price.
The Alessiof indicator allows us to use 4 types of EMA together with Bollinger bands.
The best way to perfect your trading training is to practice with charting platforms like Tradingview. Regarding this lesson, we recommend that you use the indicator “4EMA+Bollinger Bands” of Alessiof, with which you can have at your disposal 4 exponential moving averages combined with the Bollinger bands (another indicator that we will explain in the following lessons).