Moving Average is a series of data added together and divided by the parameter to determine the average of data series. It helps to smooth the series of data points and reduce random movement. The Moving average gives us a more meanful result by taking out random data point.
There are 2 Basic Moving Averages widely used are:
1) Simple Moving Average (SMA)
2) Exponential Moving Average (EMA)
When we talking about Moving Average, the common question that was "What is the type of Moving Average used and what parameter value are you using?" The parameter value of the moving average is crucial. There are 3 types of parameter and the value take reference to number of days. Eg EMA5 take reference of the price of 5 day:
1) Fast parameter (Less than 20) - Most trader would use 5 or 20 as their fast parameter. Fast parameter is very sensitive to price changes, tends to have more false signal.
2) Medium parameter (From 20 to 50) - Most trader would use 26, 29 or 50 as their medium parameter. Medium parameter is less sensitive to price and more accurate. A good way to use the medium parameter as support/resistance to enter a trade.
3) Slow parameter (100 or 200) - The signal that is generated is very reliable.
How to make use of Moving Average
For SMA & EMA:
- Some trader use Price and Moving Average Crossover:
If the candlestick moves above SMA29/EMA29 and gradually moving up and away from the line , Buy signal.
If the candlestick moves below SMA29/EMA29 and gradually moving down and away from the line, Sell signal.
See the Picture below for understanding.
For EMA:
Dual Moving Average Crossover is another method used by traders.
When 2 moving average intersect , a signal is given. For the example below:
EMA5 - red
EMA26 - blue
When the Fast parameter (red) intersect the Medium parameter (blue), it generate a signal.
Click to Enlarge the picture to see more clearly
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