Moving averages (MA) are some of the most used indicators and the pillars of Technical Analysis. They are a trend-following or lagging, indicator because it is based on past prices.
There’s a variety of different versions of Moving Averages, starting with the Simple Moving Average (SMA).
Simple Moving Average (SMA)
SMA is the easiest moving average to construct. It is simply the average price over the specified period, giving equal weight to all data. This means that sudden price movements don’t have that much of an effect on it.
Simple moving average = (P1 + P2 + P3 + P4 + … + Pn) / n
Exponential Moving Average (EMA)
Next, the Exponential Moving Average (EMA) is similar to the Simple Moving Average (SMA), measuring trend direction over a period of time. However, whereas SMA simply calculates an average of price data, EMA applies more weight to data that is more current. Because of its unique calculation, EMA will follow prices more closely than a corresponding SMA.
EMA = (K x (C – P)) + P
C = Current Price
P = Previous periods EMA (A SMA is used for the first period’s calculations)
K = Exponential smoothing constant
DEMA (Double Exponential Moving Average)
The DEMA uses two exponential moving averages (EMAs) to eliminate lag, as some traders view lag as a problem. The DEMA is used in a similar way to traditional moving averages (MA). The average helps confirm uptrends when the price is above the average and helps confirm downtrends when the price is below the average. When the price crosses the average that may signal a trend change. Moving averages are also used to indicate areas of support or resistance.
DEMA = ( 2 * EMA(n)) – (EMA(EMA(n)) ), where n= period of time
Ways of using Moving Averages
MAs are often used to determine trend direction. If the MA is moving up, the trend is up. If the MA is moving down, the trend is down. The 200 bar MA is used to determine the longer trend, while shorter periods of data like the 50 bar MA is used to determine the shorter-term trend. And there are smaller time frames that you can use to determine even shorter-term trends.
Price crossing MAs is often used to trigger trading signals. When prices cross above the MA, you might want to go long; when they cross below the MA, you might want to go short.
MA Crossing MA is another common trading signal. When a short period MA crosses above a long period MA, you may want to go long. You may want to go short when the short-term MA crosses back below the long-term MA.
The death cross occurs when the short term average trends down and crosses the long-term average, basically going in the opposite direction of the golden cross, and is understood to signal a decisive downturn in a market.
The golden cross occurs when a short-term moving average crosses over a major long-term moving average to the upside and is interpreted by analysts and traders as signaling a definitive upward turn in a market.
Lower Time Frame Trends
When trading on lower time frames you need tools that react faster to price action, a very popular combination is the 7 and 21-period moving averages combined.
But you can also customize these settings and try to find what works better for your trading style. Be it smaller or larger time frames.
You can even create certain simple trading strategies using multiple MAs, after which you can use them to automate your trading using FreqTrade. We have multiple blogs on how you can achieve this, and if you need a helping hand you can always reach out to us.
Below we have listed previous articles on how to automate strategies with MAs. We also provide a service where we can manage a trading bot for you!
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