Used in the trading industry, a moving average indicator, is an indicator that works in the smoothening out of the prices in the market. It achieves this by averaging the individual price fluctuations into a single line as an indication of the trend the product is following. It is mainly based on past prices, and it is therefore considered a lagging indicator.
It may be used singly or in conjunction with other marketing indicators when the need arises.
In the market today, we have two major types; the Simple Moving Average and the Exponential Moving Average. The SMA is an average of price over a specific timeframe whereas the EMA posses a multiplier in its calculation, giving it more weight to more recent data points.
Both indicators use periods of 50,100 and 200 as plotting points, where the traders track the price action for days, months, or even years.
Below are some of the advantages the use of moving averages posses to the market
Moving averages are reliable
Its reliability comes from the fact that they can be used as a conclusive method to indicate market trends. It also functions as the backbone of several other indicators, mostly on the calculations. Meaning some strategies cannot be concluded without the use of these two moving average indicators.
Moving averages are diverse
The moving average indicators can be used in all markets, including stocks, currencies, forex, and cryptocurrencies, just to mention a few. Their diversity makes it a prevalent indicator utilized in almost all industries in the world. As long as you have the basic knowledge, you are good to make a trade that will benefit you.
They are easy to calculate and interpret
Considering moving indicators work best in trend following systems, they are mostly represented on a line graph chart. This pictorial representation gives easy insight into a trend’s direction, its magnitude as well as its rate of change. From a well-labeled diagram, one is able to quickly determine either there is an uptrend or a down-trend or even a lag. The readings on the charts are quite straightforward, and so are the calculations.
Moving averages are stable
Owing to the fact that they use prior price comparisons, for a company that has a constant demand, it offers a stable and reliable trend outcome. It is therefore used by a lot of companies for forecasting goods and commodities where there is seasonality. They give out the constant forecast, hence their stability.
Moving averages are conclusive
This basically means that moving averages make it possible for one to plot several differing moving average lines all at the same time. This gives a trader or investor a broader outlook on the trades they are about to either buy or sell. From these reports, one can conclude whether a trade is worthwhile or not.
They cover both quick and slow showing price actions
The two types, Simple Moving Average and the Exponential Moving average cover a broad spectrum of the pricing system. The SMA caters for the slower ones displaying a smooth chart eliminating fakeouts. While EMA is quick moving and shows recent price swings. By application of both strategies, one gets a broader picture of the trend a specific market follows.
They work as good predictors
Both indicators work to show a trader when the best time either buy or sell. One might use a more extended period simple moving average to determine the overall trend is. And then use the shorter period exponential moving average to find the best and optimum time to enter or leave a trade.
As seen above, the use of the moving average methods does go a long way into helping you differentiate a good deal from a bad one. It is now easier to know when to buy or sell a commodity in the market. But you must first understand what they are about. They are both instrumental only if adequately understood.