The moving averages
The most used indicators by traders
What are
The moving average shows an average of prices over a number of time periods.
It is called “mobile” because each point of the same is recalculated always using the series of data referring to a certain time period of trading sessions; in summary, the moving averages are always calculated on the same period length of the chosen time frame, always discarding the oldest data, restored by the most recent one as time passes. These data always refer to the chosen reference period, so it is logical to think that this varies daily in the case of time frame day (or every 4 hours in the case of time frame 4H for example) creating a trend follow indicator that is always on the move and updated. constant.
Moving averages do not predict the direction of prices, but define its assumed direction, although they are lagging due to their construction based on past prices. Nonetheless, moving averages are likely to help identify price action and filter out the background noise generated by volatility.
These moving averages can be used not only to identify the direction of the trend, but also to define potential support and resistance levels.
They also constitute the constituent elements of many other technical indicators, such as the Bollinger Bands, the MACD and the Ergodic.
Moving averages do not predict the direction of prices, but define its assumed direction, although they are lagging behind due to their construction based on past prices
Typologies
The two most popular types of moving averages are simple moving average (SMA) and exponential moving average (EMA). Simple Moving Averages (SMA) are an actual average of prices over the specified time period, while Exponential Moving Averages (EMA) give more weight to more recent prices. There are other types of moving averages, but we can say that these two are used by the majority of traders for their studies.
Signal delay
The moving averages as we have seen are trend follow, which means that they collect data from the past and therefore always have a delay on visible market prices.
A 10-period moving average is calculated on prices fairly close to real-time quotations, proving to be more responsive to the change in trend than a 200-period moving average which in fact will move very little and with little sensitivity. Basically, the longer the moving average, the greater the delay of the trend change signal.
In addition, the type of moving average also affects the delay: the EMA, with the most recent data weighted more heavily, will stay closer to current prices than an SMA; the latter as known, attributes the same weight to past data compared to the EMA which gives a greater weight to the latest data surveys for the same period studied, resulting more sensitive to price changes.
Signal delay between SMA and EMA over the same period of 50 stock market sessions
Construction
Simple moving averages (SMA) and exponential ones (EMA) have a different construction given by the purely mathematical calculation that differentiates them.
The construction of the SMA happens in this way:
SMA = (Today’s closing price + Yesterday’s closing price + no. Closing prices taking past data) / number of observations
Assuming today’s closing price of $ 51 and yesterday’s closing price of $ 50, we can calculate the SMA
SMA = (51 + 50) / 2 = 50,5 $
EMAs attribute more influence to recent numbers and less influence to older data, due to a weighting variable in the calculation. This makes them more sensitive to price fluctuations and also ends up making the line uniform.
Exponential Moving Averages (EMA) need the following data:
- Today’s closing price (let’s assume $ 51)
- Yesterday’s closing price (let’s assume $ 50)
- n = Period observed (let’s assume 2 sessions)
- K = exponential multiplier
The multiplying factor K will be equal to : K = 2/ (1 + n ) = 2 / (1 + 2) = 0,667
Calculate EMA2 = (Today’s price x multiplier) + [Yesterday’s EMA x (1 – multiplier)]
EMA2 = (51 x 0,667) + (50 x 0,333) = 34,17 + 16,65
EMA2 = $ 50,667
We can see right away that the EMAs are closer to current prices than the SMAs. By increasing the number of observations, this difference is sometimes very large.
Length and time
The length of the moving average depends on the trader’s time horizon and on the analytical objectives derived from the graphical studies.
Short moving averages (5-20 periods) are best suited for short term trends and trading.
Traders interested in medium-term trends use longer moving averages which could extend 20-60 periods.
Long-term investors will prefer 100-period moving averages with a particular focus on 200-period moving averages.
Alcune medie mobili semplici (SMA) sono abbastanza popolari, tra cui la 20, la 50 e la 200 periodi, spesso utilizzate per gli studi grafici anche contemporaneamente.
For the EMAs, it is appropriate to refer to the Fibonacci sequence which sees 8, 13, 21, 34, 55, 89, 144 and 233 as frequently used values.
The use of the SMA or EMA depends on one’s trading method and style, therefore it is not unusual to see the same chart studied with one instrument rather than another. The trader uses the method most congenial to him.
The three most used moving averages represented on the same chart: SMA20, SMA50, SMA200
Entry and exit signals
Regardless of the type of moving average you intend to use and the period of the moving average itself, we can use this tool to identify exit or entry signals to the market directly from the chart by correlating the price situation with the intersection of the same with the moving average.
A price overrun from the bottom to the top of the moving average gives a BUY signal, while a price overrun from the top to the bottom of the moving average gives a SELL signal.
The more the moving average is short-term, the more signals you will have. Very long moving averages (for example the 200 periods) will eliminate all background noises, with intersections between them and prices, even on a few occasions in 6-12 months.
Moving Average Intersection With Prices: Buy and Sell Signals