What is a Moving Average?
A moving average is a technical indicator that market analysts and investors may use to determine the direction of a trend. It sums up the data points of financial security over a specific time and divides the total by the number of data points to arrive at an average. It is called a “moving” average because it is continually recalculated based on the latest price data.
Analysts use the moving average to examine support and resistance by evaluating an asset’s price movements. A moving average reflects the previous price action/movement of a security. Analysts or investors then use the information to determine the potential direction of the asset price. It is known as a lagging indicator because it trails the price action of the underlying asset to produce a signal or show the direction of a given trend.
Simple Moving Average (SMA)
Analysts and investors use the SMA indicator to buy and sell signals in crypto markets. The SMA helps identify support and resistance prices to obtain signals on where to enter or exit a trade. When generating the SMA, traders must first calculate this average by adding prices over a given period and dividing the total by the total number of periods. The information is then plotted on a graph.
Example of how to use Simple Moving Average
Jonas, is crypto trader, wants to calculate the simple moving average for Polkadot (DOT) by looking at the closing prices of the coin for the last five days. The closing prices for Polkadot (DOT) for the last five days are as follows: $23, $23.40, $23.20, $24, and $25.50. The SMA is then calculated as follows:
SMA = ($23 + $23.40 + $23.20 + $24 + $25.50) / 5
SMA = $23.82
A simple moving average simplifies price data by smoothing it out and creating one flowing line. This makes seeing the trend easier. Simple moving averages can also highlight areas of potential support or resistance. While this may appear predictive, simple moving averages are always based on historical data and show the average price over a specific time.
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