Why Moving Average isn’t your average indicator?
It’s obvious from the title that this post is about moving average and how it’s one of the most powerful (yet mostly ignored) indicator.
This is not just another read about how Moving average works.
I wanted to highlight the core principle of mastering a skill and perfecting it. It holds true even as a trader to moving average indicator.
It’s better to master one indicator than to just know a few half way.
So the indicator in the discussion is Moving Average. There are many types of Moving Average like Exponential, Weighted, Simple and many more. For this post, we will focus on only Simple and Exponential Moving Average.
SMA(simple moving average) and EMA(exponential moving average) focused on one key thing, the rate of change of price.
If Price is speed then Moving average is the acceleration.
Just like racing has curves and steep turns, trading has its ups and downs. That’s why acceleration is mostly better than top speed in a race.
This post we will specifically focus on 2 new ways you can use the moving average.
Open-Close Crossover :
Plot two EMA or SMA of any length you like, personally I like 20 length.
Then Change the source of one to Close price and other to Open price. Below screenshot is of EMA(close) and EMA(Open) both of 20 Length.
Am sure you have noticed price racing up every time EMA(close) crossover EMA(open) and down when the opposite happens. As straight forward it is, I want you to focus and understand, WHY!
Why and What does EMA(close) crossover EMA(Open) mean. In the above case, it means the Average Close over the last 20 candles was Greater than the average Open value. (More weightage is given to recently value in EMA’s)
Below is the similar example with SMA (Close) and SMA (Open).
The key difference between SMA and EMA is that EMA is more dynamic and react faster to recent price movement. As they give more weightage to the recent price in their calculation and hence many preferred it over SMA in many situations.
So to recap, the reason price tends to rise when EMA or SMA of Close price crossover EMA or SMA of Open is because ? ……….
The answer is that
the acceleration of Close Price is faster than the acceleration of Open price. So it’s probable that close price might continue to be higher than open for some time meaning Upward price and Vice Versa.
the second way to use Moving Average.
EMA-SMA Crossovers :
As I mentioned above EMA is more dynamic as their calculation give more weightage or value to the recent price.
Plot an EMA and SMA for the same length and the same source. In the below Screenshot, the length is 20 and source is Close price.
Some things are uniquely better about this crossover, the Signal from the crossover is given a bit more in advance than the previous EMA crossover SMA approach and that due to the fact, we are focusing on the same Close price but are more sensitive to recent price change thanks to EMA.
This extra sensitive to the price change is the attribute of moving average.
EMA is more sensitive as its represent the acceleration of the price change more recent compared to the acceleration in price by simple moving average.
Feel free to try the above two example and let me know of your results.
So what to do to improve the use of Moving average.
I used a MACD crossover to help me filter the minor noise and focus on the big moves only.
So, Go on the test the above-suggested idea and see for your self.
- Plot 2 EMA of 20 lengths with close and open as the source respectively and colour them differently.
- Plot MA and EMA of same length and source with different colours.
Hope you like what you see.
Please note to do your own research and I personally use these to help me with the entry. My exit is mostly based on Risk: Reward and money management including a strict Stoploss.
The big question to ask is how will I know which crypto EMA(close) has Crossed Over EMA (open) or which crypto’s EMA(close) Crossover SMA(close) at the same time show have MACD crossover.
I get it, it’s not humanly possible to monitor all the coins in an exchange 24/7 for multiple candle time frame. No worry,