Class 101: What is the MA? What is the SMA? How to use moving averages in trading
The MA is now viewed by many traders as a “national” technical indicator. Whether you are a newcomer or an experienced expert, the MA line plays an important role in decision-making.
So what is the MA? What types of MA lines are there? How do I use MA for the best effect? All are answered in this Trading 101 Class. Let’s get ready for class!
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What is the MA?
The moving average, also known as the moving average, is determined by averaging the price series over a period of time. This is a very popular indicator in technical analysis that traders frequently use. The MA is divided into 3 types, including:
SMA (simple moving average)
This is a simple moving average that is calculated as the average of the closing prices over a given trading period.
EMA (Exponential Moving Average)
This is a moving average performance calculated using the exponential formula. EMAs usually focus on recent price movements. Because of this, this indicator is very sensitive to short-term fluctuations and can detect abnormal signals faster than the SMA.
WMA (weighted moving average)
This is a linear weighted average that focuses on the parameters with the highest frequency. That means the WMA will focus on both high volume pricing tiers and the quality of the money flow.
Of the 3 moving averages above, the SMA is the popular choice of many traders today. Therefore, CoinCu will introduce this indicator in more detail in this article!
Classification of the SMA line and the formula for calculating the SMA line
The SMA is divided into 3 popular types including:
- Short-term SMA: SMA (7), SMA (14) or SMA (20)
- Medium-term SMA: SMA (50)
- Long-term SMA: SMA (100); SMA (200)
SMA (7) means the 7-day moving average, which is determined on the basis of the closing price of the last 7 days. The SMA is calculated using the following formula:
SMA (N) = (P1 + P2 + P3 + .. + Pn) / N
- P1: closing price on day 1
- P2: closing price on Monday
- P3: closing price on Tuesday
- Pn: closing price on day n
- N: Number of days selected to determine the SMA
Advantages and disadvantages of the SMA .line
The SMA is a slow indicator that eliminates short-term fluctuations in noise. In the long term, the SMA is also a very reliable technical indicator.
The SMA has a remarkable practical character. That is, it accurately reflects investor sentiment at support or resistance levels.
If you are a trader who often trades in short time frames like M30, M15, M10 or M5, the SMA is not an effective choice. Because the sensitivity to short-term fluctuations of this moving price is relatively low.
How to use moving averages effectively
Use as support / resistance
The moving average can be used as either a support or a resistance. Similar to most other indicators, the longer the timeframe you use, the stronger the support / resistance.
Two MA lines intersect
Determining the market trend with the crossing of 2 SMA lines is a popular trading method today. To apply this approach, a short-term SMA and a medium / long-term SMA.
The meaning when these 2 SMA lines cross is as follows:
- Short-term SMA crosses over long-term SMA: upward trading signal -> you can go long
- Short-term SMA falls below the long-term SMA: downward trade signal -> you can go short
Slope of MA
The slope of a moving average, especially over a long period of time, can help you see market trends clearly.
- When the MA is sloping up, it shows that the market is in an uptrend.
- If the MA is flat and starting to decline, it is likely that the market is about to enter a downtrend phase.
However, you have to keep in mind that the moving average is a slow indicator. Even the slope of the MA only helps to recognize the trend more clearly. Hence, a single MA is unable to identify a market reversal signal.
The MA line will often promote the most effective area used in medium and long term transactions. Hence, if you are a trader who frequently trades short frames, there are some other technical indicators that you should combine. This will help you make better profits, or at least make sure your account doesn’t burn out.
I hope today’s lesson plan has helped you better understand what the MA is and find some ways to trade with the MA. Don’t forget to follow Transaction class 101 from CoinCu to learn more interesting and useful lectures!