Bybit Talk — Using MAs in your trade
Moving Averages is an Indicators Tool that been widely used by Traders across the world since a long time. In Today Bybit Talk Section, we will talk about Moving Averages and how to use it to maximized your Profit.
I. What is Moving Averages
The moving average (MA) is a simple technical analysis tool that smooths out price data by creating a constantly updated average price. The average is taken over a specific period of time, like 10 days, 20 minutes, 30 weeks or any time period the trader chooses. There are advantages to using a moving average in your trading, as well as options on what type of moving average to use. Moving average strategies are also popular and can be tailored to any time frame, suiting both long-term investors and short-term traders.
Example of Moving Average:
II. How to Calculate a Moving Averages. Types of Moving Averages.
A moving average can be calculated in different ways. A five-day simple moving average (SMA) adds up the five most recent daily closing prices and divides it by five to create a new average each day. Each average is connected to the next, creating the singular flowing line.
Charting software and trading platforms do the calculations, so no manual math is required to use a moving average.
But in case that you want to know the Formula behind, its something like this:
SMA= (A1 + A2 +…. +A(n))/n
where:
A=average in period n
n=number of time periods
Another popular type of moving average is the exponential moving average (EMA). The calculation is more complex, as it applies more weighting to the most recent prices. If you plot a 50-day SMA and a 50-day EMA on the same chart, you’ll notice that the EMA reacts more quickly to price changes than the SMA does, due to the additional weighting on recent price data.
The Formula of EMA is:
where:
EMA t =EMA today
V t =Value today
EMA t =EMA today
S = smoothing
D = number of days
III. Understanding Moving Average (MA)
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.
The longer the time period for the moving average, the greater the lag. So, a 200-day moving average will have a much greater degree of lag than a 20-day MA because it contains prices for the past 200 days. The 50-day and 200-day moving average figures for stocks are widely followed by investors and traders and are considered to be important trading signals.
Moving averages are a totally customizable indicator, which means that an investor 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.
IV. Why use MAs and EMAs?
One way to use moving averages is to help you determine the trend. The simplest way is to just plot a single moving average on the chart.
When price action tends to stay above the moving average, it signals that price is in a general UPTREND.
If price action tends to stay below the moving average, then it indicates that it is in a DOWNTREND.
A moving average can also act as support or resistance. In an uptrend, a 50-day, 100-day or 200-day moving average may act as a support level, as shown in the figure below. This is because the average acts like a floor (support), so the price bounces up off of it. In a downtrend, a moving average may act as resistance; like a ceiling, the price hits the level and then starts to drop again.
Below is an example of Moving Average act as support/resistance following the trend.
But you Notice that, the problem is price may not have always follow the MA 100% of the times.
So another way to use MAs is using MAs Cross over.
First thing to do is to apply two moving averages to a chart: one longer and one shorter. When the shorter-term MA crosses above the longer-term MA, it’s a buy signal, as it indicates that the trend is shifting up.
Meanwhile, when the shorter-term MA crosses below the longer-term MA, it’s a sell signal, as it indicates that the trend is shifting down.
V. MA Disadvantages
Moving averages are calculated based on historical data, and nothing about the calculation is predictive in nature. Therefore, results using moving averages can be random. At times, the market seems to respect MA support/resistance and trade signals, and at other times, it shows these indicators no respect.
One major problem is that, if the price action becomes choppy, the price may swing back and forth, generating multiple trend reversal or trade signals. When this occurs, it’s best to step aside or utilize another indicator to help clarify the trend. The same thing can occur with MA crossovers when the MAs get “tangled up” for a period of time, triggering multiple losing trades.
Moving averages work quite well in strong trending conditions but poorly in choppy or ranging conditions. Adjusting the time frame can remedy this problem temporarily, although at some point, these issues are likely to occur regardless of the time frame chosen for the moving average(s).
VI. The Bottom Line
A moving average simplifies price data by smoothing it out and creating one flowing line. This makes seeing the trend easier. Exponential moving averages react quicker to price changes than simple moving averages. In some cases, this may be good, and in others, it may cause false signals. Moving averages with a shorter look back period (20 days, for example) will also respond quicker to price changes than an average with a longer look back period (200 days).
Moving average crossovers are a popular strategy for both entries and exits. MAs can also highlight areas of potential support or resistance. While this may appear predictive, moving averages are always based on historical data and simply show the average price over a certain time period.
