Trading – Moving Averages (MAs)
[Often cited to as Simple Moving Averages (SMAs)]
Whether you take a long position or a short position, trading with moving rates will not only give you a better 'feel' for the trade but will also help in controlling fear and greed in the trade. Moving rates (MAs) are calculated by adding the closing price of an investment vehicle (stocks, futures, ETFs, etc.) for a specific number of time periods and then dividing this total by the number of time periods. If you have a chart set to 5 minutes, it will provide you with candlesticks that represent a 5 minute period. If you then take a MA of 20, it will count back 20 candlesticks and make that calculation based on those 20 periods of time. Short-term rates (5 MA as opposed to 50 MA) respond faster to changes in the price than longer term rates. Equal weight is given to each period of time specified. As a new 5 minute period begins, it will again count back 20 time periods and give a new value to the average so resulting in a line that can be graded.
Most trading platforms and graphing programs will allow you to customize your charts to include MAs. You should also be able to change the time periods that you would like to watch on your chart. These two options are an absolute 'must' when you are choosing a graphing program, graphing software and / or a trading platform. I would think that the vast majority of these items contain the ability to use MAs and change graph settings but if you run into one that does not have these basic options, it will be best to look elsewhere.
Many traders use these lines to determine the momentum or momentum changes in a trading vehicle's direction. They will use a slower moving larger MA [Such as 50 MA] in conjuction with a faster moving smaller MA [such a 5 MA]. Since the smaller MA is moving faster than the larger MA, they will cross at certain times. This is used by traders to determine probable changes in direction.
Some people choose to use more than one or two MAs. They create a 'fan'. A fan can have ten, twenty or more MAs all being used together and it gives a 'fan' look to the graph. It looks almost like a wave twisting and turning as the market is making consolidations and changes in momentum.
You will have to dabble with these settings and make a decision on which will work for you best. Again, trading style is a factor as well as accuracy. So play with the numbers for a while and decide which provides the best translation for you to use with your trades.
Exponential Moving Averages (EMAs)
Exponential Moving Averages (EMAs) are calculated in a similar fashion as the Simple Moving Average is calculated with one main difference. The difference between EMAs and MAs is that the EMAs use a weighted average. The weight is increased for the latest data given. In general, EMAs move much faster than MAs and because it is weighted, it gives current data more precedence.
Similar to MAs, you can use several EMAs representing different time periods to average. And the crossing of two EMA lines can indicate a change in momentum. The larger the EMA, the slower it will move and conversely, the smaller the EMA, the faster it will move.
Most trading platforms and graphing programs will allow you to customize your charts to include EMAs. You should also be able to change the time periods that you would like to watch on your chart.