Let’s look at more on what are moving averages.
By looking at the slope of the moving average, you can better determine the trend direction.
As we said, moving averages smooth out price action.
There are different types of moving averages and each of them has its own level of “smoothness”.
Generally, the smoother the moving average, the slower it is to react to the price movement.
The choppier the moving average, the quicker it is to react to the price movement.
To make a moving average smoother, you should get the average closing prices over a longer time period.
The “length” or the number of reporting periods, including the moving average calculation, affects how the moving average is displayed on a price chart.
The shorter its “length”, the fewer the data points that are included in the moving average calculation, which means the closer the moving average stays to the current price.
This reduces its usefulness and may offer less insight into the overall trend than the current price itself.
The longer its length, they included the more data points in the moving average calculation, which means the less any single price can affect the overall average.
If there are too many data points, price fluctuations may become “too smooth” that you won’t be able to detect any kind of trend!
Either situation can make it difficult to recognize if price direction may change in the near future.
For this reason, it’s important to select the length (or periods) that provides the level of price detail appropriate for your trading timeframe.
Now, you’re probably thinking, “C’mon, let’s get to the good stuff. How can I use this to trade?”
In this section, we first need to explain to you the two major types of moving averages:
We’ll also teach you how to calculate them and give the pros and cons of each.
Before we move on, just remember that moving averages smooth price data to form a trend-following technical indicator.
They do NOT predict price direction; instead, they define the current direction with a lag.
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