A Quick intro to Moving Averages (Beginners)

I have recently had some questions on some of the basics such as moving averages. First of all, there is some great free content out there via sites such as Babypips

I wanted to share some simple info to at least explain what a moving average is. Where it is used and what are the types of.

Moving average is a simple, technical analysis tool. Moving averages are usually calculated to identify the trend direction of a stock or to determine its support and resistance levels. It is a trend-following—or lagging—indicator because it is based on past prices.

They also form the building blocks for many other technical indicators and overlays, such as Bollinger Bands, MACD and the McClellan Oscillator. The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).

Moving averages are a totally customizable indicator, which means you can freely choose whatever time frame they want when calculating an average. The most common time periods used in moving averages are 15, 20, 30, 50, 100, and 200 days. The shorter the time span used to create the average, the more sensitive it will be to price changes. The longer the time span, the less sensitive the average will be. @TradingView has many of these tools to use under the list of indicators.

A simple moving average is formed by computing the average price of a security over a specific number of periods. Most moving averages are based on closing prices; for example, a 5-day simple moving average is the five-day sum of closing prices divided by five. As its name implies, a moving average is an average that moves. Old data is dropped as new data becomes available, causing the average to move along the time scale.

Then you have an Exponential Moving Average (EMA).
reduce the lag by applying more weight to recent prices. The weighting applied to the most recent price depends on the number of periods in the moving average. EMAs differ from simple moving averages in that a given day's EMA calculation depends on the EMA calculations for all the days prior to that day. You need far more than 10 days of data to calculate a reasonably accurate 10-day EMA.

Highlighting the difference between an MA & an SMA - The Smoothed Moving Average (SMMA) is similar to the Simple Moving Average (SMA), in that it aims to reduce noise rather than reduce lag. The indicator takes all prices into account and uses a long lookback period.

Then how it can be used and applied, *** There are many strategies out there, the most basic starts with above or below a level (above = buy, below = sell) And then it steps into two moving averages crossing for example. Also as I mentioned above - other indicators use a form of moving average to calculate their plot.

Another simple strategy - Investopedia

This moving average trading strategy uses the EMA, because this type of average is designed to respond quickly to price changes. Here are the strategy steps.

🍒Plot three exponential moving averages—a five-period EMA, a 20-period EMA, and 50-period EMA—on a 15-minute chart.
🍒Buy when the five-period EMA crosses from below to above the 20-period EMA, and the price, five, and 20-period EMAs are above the 50 EMA.
🍒For a sell trade, sell when the five-period EMA crosses from above to below the 20-period EMA, and both EMAs and the price are below the 50-period EMA.
🍒Place the initial stop-loss order below the 20-period EMA (for a buy trade), or alternatively about 10 pips from the entry price.
🍒An optional step is to move the stop-loss to break even when the trade is 10 pips profitable.
🍒Consider placing a profit target of 20 pips, or alternatively exit when the five-period falls below the 20-period if long, or when the five moves above the 20 when short.


I hope this helps - Please feel free to add more info below. Any suggestions & comments to help new traders, always appreciated.



Disclaimer
This idea does not constitute as financial advice. It is for educational purposes only, our principle trader has over 20 years’ experience in stocks, ETF’s, and Forex. Hence each trade setup might have different hold times, entry or exit conditions, and will vary from the post/idea shared here. You can use the information from this post to make your own trading plan for the instrument discussed. Trading carries a risk; a high percentage of retail traders lose money. Please keep this in mind when entering any trade. Stay safe.