We talk about Moving Averages. 🖌Origin of moving averages:
They are used to filter out market noise and clarify the direction of the trend, as they eliminate minor movements that could be hiding what the market is actually doing. The average price of a given period in the past is calculated, the result is plotted on a line chart next to the price chart. They are more suitable for detecting trends but are also useful for analyzing the evolution of the price in different periods of time.
How are they calculated?
The moving averages are the moving average and to calculate them the last periods that are parameterized for their calculation are taken. For instance; For a 10-period moving average, the last 10 price closing candles are taken and their average is taken.
Remember that a moving average is always lagging because it is the result of making a calculation on the prices of the past, they do not predict the price, they only summarize more clearly what has happened in the price. Its usefulness, therefore, helps us to detect or see trends more clearly. And in technical analysis, it is considered that when there is a trend it is more likely to continue.
The shorter the moving average calculation period, the less lag it will have, but it will include more volatility than longer period moving averages. The longer the moving average calculation average, the longer it will take to react to recent market changes.
What is the best moving average?
Surely you were waiting for me to tell you which is the best moving average because there is no better moving average than another, they are all worth it, they are all good, you just have to understand them well. Some are true that they are more used as 20, 50, 100 and 200. All the moving averages are showing you the line chart with the longest temporality (Except 1). So, a 5-period moving average is equivalent to the linear graph of multiplying that timeframe by 5. For example; If we were in 1-minute time frames it would be equivalent to the 5-minute line chart and if it were the 60 moving average it would be the 1-hour line chart.
Moving averages and temporalities.
If we take into account the moving average of 160 periods, it would be exactly equal to the moving average of 80 periods in 1 hour and of 20 periods in 4 hours.
Types of moving averages.
Since it is understood how the moving average works, we are going to talk about the 3 most used types of moving average.
a) Simple moving average (MA): All the data of the period are weighted equally, all the candles have the same importance from the first to the last candle that is periodized, of which an average is taken. It is the most typical and the easiest to calculate, but also the slowest to adapt to the most recent price changes.
b) Media móvil ponderada ( WMA ): Con este tipo de media móvil se le da diferente importancia a cada una de las velas, dando más prioridad a las primeras velas y dando menos importancia a las últimas velas a calcular, en su fórmula se asigna un coeficiente a cada uno de los valores. Esta media móvil reacciona más rápidamente a los últimos cambios de precios.
c) Exponential moving average (EMA): Its calculation is more complicated but basically, an additional value is carried to the selected period, that is; for a 10-period exponential moving average, the last 11 candles are considered. These are done to minimize the sudden effect that occurs when eliminating the first data in the series, the most recent candle or price is weighted in greater percentages, while the rest of the candles all weigh equally. Arguably the "EMA" is equivalent to a simple moving average to which an additional period is added and the recent price is weighted much more.
How to use them?
Moving averages are considered to act as dynamic support and resistance, when the price is trending they act as a trend line that sets the guideline, but they also have the quality of "Attracting" the price, as they remain an average of the price. and by the statistical principle that everything returns to its average at some point.
Another utility is that it also helps us to detect price highs, since all the data of distribution tend to group around its average, if a strong impulse moves the price away from the moving average, at some point the price will return to its average. half. and this will help us to detect extremes of the market For example; when the price is too far from its midpoint and you may be ready to make a correction. This is the beginning for which indicators like the MACD are created. If the price is far from its moving average it is very easy to detect it visually.
