What Are Moving Averages.
Basically Moving averages are a delayed indicator which means its works from previous results you choose the time from 1 minute to 10 years then it automatically plots that data onto a chart for you.
Think back to school if you can it was a long time ago for me now think about a line chart with X and Y axis that you learnt at school.
Each day or your chosen time frame you plot a mark on to the chart then the next another and so on then you join a line between them all you have a line chart as below.
Moving averages are calculated just the same but they come in many different forms I have listed below the ones I know of if you just click onto the one you are interested in it will jump to that part of the post.
- Simple and Moving Average, MA, & MA Cross
- Moving Average Sources
- Moving Average Calculation
- OHLC4 Open, High, Low, Close moving average calculation
- EMA exponential Moving Average, EMA Cross Double EMA, & Triple EMA
- MA & EMA cross
- Hull Moving Average
- Moving Average Weighted
- MACD – Moving Average Convergent Divergent
- Moving Average Channel
- Arnaud Legoux Moving Average
Simple Moving Average
A simple moving average is as it says the simplest of moving averages
It just uses one factor for each calculation which I don’t think is very useful it doesn’t reflect whats going on in a broader context but more on that later.
On a chart you select a time frame to display the results lets say for example 5 mins for each frame during that 5 mins there is an open, high, low and a close
The simple moving average uses the close of each of those time frames so if you selected an SMA. Simple moving average scale of 15 it would take the close of the last 15 frames add them together then divided them by 15 to get the required result.
Once this segment is completes a frame it drops the last frame off the list and uses the new one to plot on the chart hence its a moving line.
This can then be used as an indication of the trading trend if it’s in an uptrend, downtrend or flat as with all indicators that’s what they are indicators not a specific level or trading set up its just saying this is what has happened in the past.
Below are a couple of examples of different lengths of MA on the exact same chart and time frames I only changed the length of MA.
As you can see the longer the time frame the smoother the line as its using a lot more data for its calculation
Simple Moving Average Calculation one
Below is how the MA calculates and plots onto the chart it depends on the source as well more on that later but I am just using the close for this example.
The last five close prices are as follows 33.40 – 33.42 – 33.45 – 33.49 – 33.56.
so the calculation would be
33.40 + 33.42 + 33.45 + 33.49 + 33.56 = 167.32
so we then divide the number of results by 5 which equals 33.46 so it plots this figure on your chart. see chart below for proof.
Simple Moving Average Calculation Two
I’m now going to base it on ten now keeping with the close for the calculation.
33.40 – 33.42 – 33.45 – 33.49 – 33.56 – 33.54 – 33.54 – 33.52 – 33.55 – 33.57
33.40 + 33.42 + 33.45 + 33.49 + 33.56 + 33.54 + 33.54 + 33.52 + 33.55 + 33.57 = 335.04
so then we divide this number by 10 which works out to be 33.50
Moving average source
As mentioned earlier you can choose which source of information it uses from the chart to change the MA line slightly as everyone is different.
There are various options for the moving average to calculate its results they can be changed and altered as seen in the image above its possible for it to calculate from the close, open, high, and low also combined averages as well see below for explanation.
Combined moving average time frames
Below is an explanation of the combined time frames as seen in image above.
- HL2 – Previous Highs and lows is taken into consideration
- HLC3 Previous Highs, Lows and closes are taken into consideration
- OHLC4 Previous Opens, Highs, Lows, Closes Are taken into consideration.
OHLC4 Moving average calculation
As mentioned above there are combined sources this is the one i use on my charts as i feel it gives a better line and takes more of the market info into consideration.
see image below for a visual example I will show the calculation below with MA set at 5.
O 33.45, H 33.45,L 33.36,C 33.40
O 33.49, H 33.49, L 33.39 C 33.42
O 33.52, H 33.52, L 33.44 C 33.45
O 33.55, H 33.56, L 33.41, C 33.49
O 33.54, H 33.58, L 33.53, C 33.56
So add all of these together = 669.60 then we divide this number by 20 and tha will give us our OHLC4 MA figure 33.48
Moving average source examples
The image below green line represents OHLC4 and red is based on close.
as you can see there isn’t a massive difference between them
Simple Moving Average, MA, & MA Cross
As explained above we know what SMA means and with the other examples we have seen what MA moving average means as well it’s still an average of results it’s just using a different source that you can select as explained above I like to use OHLC4 as it takes more of the market into perspective.
So the next part to explain is what is MA cross some traders use this as an indication of a move in trend buyers to sellers or vice versa.
How they go about this is setting the frames different for each of the MA you can select MA Cross in the
It Auto populates the two lines for you typically 9 & 26 you can change
The purpose of this is to show a cross when the lines cross over each other.
This happens when the price has changed direction so the shorter of the two MA`s crosses the longer either heading up or down. This indicates the direction of trade to take
EMA exponential Moving Average
As with the MA its based on the same figures and time frames also sources but the main difference with EMA is that it concentrates more on the most recent completed time frames than the older ones.
I guess i use it becasue it just seems a bit more technical than standard MA.
There are some strategies that use MA and EMA when the cross they open a long or short position but I’m not covering that here.
Hopefully, you now can understand and use moving averages in your strategy if you wish to follow me and my pivot points and MA you’re more than welcome to Join Our Email List.
There are some specific numbers that seem to be held with good regard amongst traders 100 MA seems to hold as a good support or resistance level and will bounce off this and I plot 50 MA on my chart as well as it just helps show trends and direction changes with cross overs.
As with all indicators, they are lagging indicators they haven’t come up with one that can tell you the future yet.
If you know about one please let me know.
If you have enjoyed and learnt something from this post of i have done something wrong please reach out in the comments and let me know.
im shortly doing the next lesson so i hope you enjoy its going to aim at what to do when the stock reaches the pivot point.