Moving Average is the most common indicator, which helps to distinguish between typical market “noise” and the actual trend direction.
The Moving Average is the average closing price for the last “X” number of periods. It is also called a “Lagging Indicator” as it draws facts from the past trend and smoothes out price action.
As shown above, the moving average looks like a squiggly line overlayed on top of the price. This indicator helps us forecast future prices. The slope of a moving average determines the trend direction.
Generally, the smoother (average closing prices over a longer time period) the moving average, the slower it reacts to the price movement and vice-versa.
Types of Moving Average Indicator
Simple Moving Average (SMA)
The SMA is a basic average price over a specified time frame. In an uptrend, the price will be above the moving average. 50-200 period moving averages, the 50 periods would be considered fast as it’s more responsive to price.
In a Downtrend, the moving average will be a negative slope and price will be below the moving average.
Exponential Moving Average (EMA)
Unlike SMA, it possesses more weight to the most recent periods. It will react more quickly to price action. EMA is a common indicator among day traders, as they change more quickly with a price.
Moving Average – PROS & CONS
|Prons||Displays a smooth chart to eliminate fake outs.||Quick moving Shows recent price swings.|
|Cons||Slow-moving leads to a lag in buying and selling signals.||More prone to cause fake outs and can give errant signals.|
In the end, just remember that moving averages smooth price data to form a trend-following technical indicator.
So, are you ready?
If yes, then pumped yourself for the next lesson.