What is Moving Average – The Binary Logic

This is an indicator that is commonly used during technical analysis with the main aim of removing different factors also referred to as the “noise” that cause fluctuation in prices thus smoothening the price action. Because moving average is based on past prices, it’s considered to be a lagging indicator. There are two main types of moving average that are widely used in the industry.

The first one is simple moving average (SMA). Just as the name suggests, the SMA is the simple average of any security putting into consideration a specific duration of time. The second form of moving average is exponential moving average (EMA). Unlike the SMA, EMA gives a much bigger focus to the most recent prices. Basically, these two types of moving average are applied in identifying the direction in which a certain trend is taking and to further determine the level of support to the system or the levels of resistance. Even though the moving average is a great tool solely, it also forms the operational basis for other indicators such as the Moving average convergence divergence (MACD).

A Moving Average:

Moving Average - The Binary Logic

As stated above, moving average utilizes a lagging effect. This is to say that you will have to get an average of a specified data for a certain period of time. For example, a moving average of 11 days can be calculated by adding the closing data (in this case price) for the past 11 days and dividing it up by 11 to get an average. This is where the term “moving” has been derived from as only the data acquired in the last 11 days are moved forward to acquire an average. After acquiring the average, a MA line, either simple or exponential MA is recorded on the graph.

There are different aspects that may hinder the recording of the correct trend when time factor is put into consideration even though it is always measured by a predefined time period. The first scenario involves longer time period. When data is collected for a longer period of time and the moving average is calculated, then the results are most likely to be less sensible. On the other hand, if the time period is shorter, there is a high probability that the results will signal a false trend. It’s therefore very difficult to determine the correct time frame to collect data and calculate an MA that will be both right and sensible.

Ideally, moving averages are smoothening indicators that do away with aspects such as low or high prices and give a graphical representation of how the market trend is over a specified period of time. This way, you are able to determine what to do with your business in the near future. Basically, you will be able to determine whether the market is going to pick up in the future or prices are going to fall. This way, you are able to better organize yourself.

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