Investment has to be a strategic financial decision. If you agree and want to see your investment helping you reach your financial goals, you are at the right place. At PCEX Member, we not just allow you to invest in cryptocurrency, but also help you with the skills you need to ace across spots and futures markets for maximum gain and minimum risk. Moving average, also known as rolling average or running average is an important technical analysis tool. In today’s post from PCEX Member, you will learn what moving averages are and how to make good use of them.
“A moving average is a calculation used to analyze data points by creating a series of averages of different subsets of the full data set.”
Usability of Moving Averages
Smooth out the price data over a specified period of time by creating a constantly updated average price.
A simple moving average (SMA) is a calculation that takes the arithmetic mean of a given set of prices over the specific number of days in the past; for example, over the previous 15, 30, 100, or 200 days.
Exponential moving averages (EMA) is a weighted average that gives greater importance to the price of a stock on more recent days, making it an indicator that is more responsive to new information.
It helps in knowing the asset’s trends over a long period. It overcomes the changes triggered by random and short-term fluctuations.
Moving averages also serve as a hedging tool. You can know the support and resistance level of trading and sell and buy your assets on time to make a profit and mitigate risk. The free-moving yellow line is of moving averages and the arrow marks the support and resistance points.
Types of Moving Averages
A simple moving average (SMA) is the arithmetic mean of a given set of values. In other words, the sum of numbers or prices of a given instrument is divided by the number of prices or frequency in the set. The below equation represents the SMA formula:
#1. Simple Moving Average
#2. Exponential Moving Average (EMA)
EMA emphasizes more on the recent prices of the cryptocurrency or any asset in consideration. In EMA calculation, you also need to use the value SMA over a particular time period.
The next step is to calculate the multiplier for weighting the EMA (referred to as the “smoothing factor”). Apply the formula: [2/(selected time period + 1)] to calculate the EMA. The “selected time value” is a variable that depends upon the time period you choose to calculate the value. If you want to calculate the moving average for 20 days, the multiplier comes at [2/(20+1)]= 0.0952. Then you use the smoothing factor combined with the previous EMA to figure out the current day EMA.
Now, you must have understood what monthly margin is along with the differences between SMA and EMA. SMA assigns an equal weighting to all values while EMA gives weightage to recent prices. Comment your thoughts or queries regarding the same or let us know any other topic where you need a similar explanation.