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Mathematics of moving average
A moving average indicator is a main indicator that shows price movement direction. When processing moving averages the mathematical pricing average of a particular period as measured by candlestick quantity. For example, in order to calculate the value of a five candlestick period the indicator divides the sum of their closing values by five. Then the indicator moves one candlestick forward and makes the same calculations in this manner.
A trader can build up a line of resulting values that has a more smooth chart direction. It smooths price bursts by indicating the current trend.
In case of an increasing period the price sensitivity lowers. But lag on the price chart increases. In the indicator settings you may choose the period of the candlesticks and from among for calculation methods.
Types of moving average
Simple moving average
The simple moving average or SMA is an average arithmetical value for a given period.
Exponential moving average
Exponential moving average EMA smoothing works by taking into account the current average value on a previous period with smoothing. The priority decreases exponentially and never equals zero.
Weighted moving average
The weighted moving average WMA assigns top priority to the current price hence the WMA chart does not depend heavily on dated prices. The priority of importance increases linearly.
Smooth simple moving average
The smooth simple moving average SSMA takes into account a large amount of candlesticks throughout historical quotes and is much more smooth.
How to use moving average indicator
Moving Average is a great instrument of detection for a lateral trend wherein rules of trading that differ from rules of trend trading take precedence. Moreover when two indicators with different time intervals intersect it helps determine trend reversals.