Question 1 - Explain Your Understanding of Moving Average

A moving average is one of the many terms that is associated with technical analysis. When it comes to technical analysis, moving average is one of the technical indicators that is commonly used by a lot of traders and investors to smooth out the price actions and noise on the price chart and to better understand the direction of the market. A moving average is basically the representation of the average closing prices of any cryptocurrency over a specified time period on a chart.

A moving average indicator compares the latest prices of any cryptocurrency asset with the average price of that cryptocurrency asset during a specific time period. A lot of traders make use of the moving average indicator to identify trends in the market and also to reveal hidden patterns on the chart. At the moment, there are three common moving averages that can be used on any price chart such as simple moving average (SMA), exponential moving average (EMA) and weighted moving average (WMA). However, the two commonly used moving averages are the SMA and the EMA indicators.

_{Moving Average Indicator on the BNB/USDT Chart on tradingview}

Question 2 - What Are The Different Types of Moving Average? Differentiate Between Them.

Moving average is very common when it comes to technical analysis. Currently, there are three common moving averages that can be used on any price chart, the simple moving average (SMA), exponential moving average (EMA) and weighted moving average (WMA). Each moving average offers something different from the others and is most suited in certain situation and timeframes.

Simple Moving Average (SMA)

A simple moving average is the simplest type of all the moving averages. The SMA basically calculates the average price over a specific time period. In order words, each point on the simple moving average indicator represents the average of the previous period length. The SMA is used indicate the trend direction on a chart. A rising simple moving average line indicates an upward price movement or uptrend and a falling simple moving average line indicates a downward price movement or downtrend.The most common period length used on the simple moving average indicator is 200 periods as it calculates the long term average price on the chart. This makes the SMA very useful for long term trends and is greatly used for entry and exit signals.

Using the 20 period SMA
Simple moving average = (P1 + P2 + ... + P20)/N
Where;
Price = P
Number of periods = N

_{Screenshot of SMA on tradingview}

Exponential Moving Average (EMA)

An exponential moving average is another very common type of moving average. An EMA offers more emphasis to the current price based on a recent selected period. This means that the EMA reacts more on the current price movement and puts more importance on the latest prices. The EMA formula makes use of the weight multiplier that is based on the selected periods. This means that the EMA puts more weight on the latest periods than the past periods.

Current EMA = [ CP × (S/1+N)] + Previous EMA × [1 - (S/1 + N)]
Where;
Current price = CP
Smoothing = S
Number of Period = N

_{Screenshot of EMA on tradingview}

Weighted Moving Average (WMA)

The Weighted moving average also known as WMA is a type of moving average indicator that gives more weight on the latest prices than the previous period prices over a specific period of time. This makes the WMA to react more on the current price. Because of the weighted moving average indicator gives more weight on the latest price, it becomes very valuable for short term technical analysis and trading.

Weighted Moving Average = (P1 × N + P2 × (N-1) +... Price N) / ( N × (N+1)/2)
Where;
Price = P
Number of period = N

_{Screenshot of WMA on tradingview}

Differences

• Simple moving average gives all prices equal weights. While the exponential moving average gives more emphasis to the current price based on a recent selected period. While weighted moving average gives more weight on the latest prices than the previous period prices over a specific period of time.

• Simple moving average lags behind the price. While exponential moving average is more sensitive to the recent price changes. While the weighted moving average is very sensitive to the current price.

• Simple moving average works best on longer timeframes and for long term trading. While exponential moving average works best on shorter timeframes and short term trading. While weighted moving average works best on very short timeframes and short term trading or scalping.

Question 3 - Identify Entry and Exit Points Using Moving Average. (Demonstrate with Screenshots)

Looking at the BNB/USDT chart, we can see the buy signal from the SMA and the EMA moving averages. Using the 50 EMA and the 200 SMA, the price is well above the 200 SMA line which is a strong indication that the market is in an uptrend. Also the 50 EMA line crossed above the 200 SMA line which is a good indication that the price is about to reverse and move into an uptrend direction. This shows that the longer term price movement is bullish. The price rose above the 50 EMA line and fell back to the 50 EMA line which was an indication that the EMA line has become the dynamic support level for the price. For me, I placed a buy when the price retraced after a big green candle was formed.

_{Screenshot of BNB/USDT Chart on tradingview}

On the BNB/USDT chart, we can see the sell signal from the SMA and the EMA. Using the 50 EMA and the 200 SMA, the price is well below the 200 SMA line and below the 50 EMA line which is a strong indication that the market is in a downtrend. Also the 50 EMA line crossed below the 200 SMA line which is a good indication that the price is about to reverse and move into a downtrend direction.

This shows that in the longer period price movement is bearish. The price fell below the 50 EMA line which became the resistance level. However, the price broke above the 50 EMA resistance level but was not able to break above the 200 SMA line. This was a good indication that the market was still bearish. The price fall back down and broke below the 50 EMA line. I placed a sell after the large red candle was formed below the 50 EMA line.

_{Screenshot of BNB/USDT Chart on tradingview}

Question 4 - What do you understand by Crossover? Explain in Your Own Words.

When it comes to crossover when using moving averages indicators, crossovers can either be bullish or bearish and can also be referred to as the golden cross or the death cross. Crossover in moving averages term basically means that there is a cross between two moving average lines which is a combination of a shorter period moving average and a longer period moving average. Shorter period moving average can be the 50 EMA or 50 SMA and longer period moving average can be the 200 EMA or 200 SMA. When the 50 EMA line crosses above or below the 200 EMA line, a crossover has occurred. A golden cross occurs when the shorter period 50 EMA line crosses above the longer period 200 EMA line. Also, a death cross occurs when the shorter period 50 EMA line crosses below the longer period 200 EMA line.

Bullish crossover (Golden cross)

_{Screenshot of BNB/USDT Chart on tradingview}

From the chart BNB/USDT chart above, we can see that the bullish crossover or the golden cross occurred when the shorter period 50 EMA line crossed above the longer period 200 EMA line. After that, what followed next was an upward price movement or uptrend.

Bearish crossover (Death cross)

_{Screenshot of BNB/USDT Chart on tradingview}

From the chart BNB/USDT chart above, we can see that the bearish crossover or the death cross occurred when the shorter period 50 EMA line crossed below the longer period 200 EMA line. After that, what followed next was a downward price movement or downtrend.

Question 5 - Explain The Limitations of Moving Average

• One of the main limitation of the moving average indicator is that it is a lagging indicator which makes it difficult to predict future trend in the market.
• Moving average indicator only works with historical data, this makes it impossible to take into account other factors that affect price movement in the market
• The moving average can make it difficult to carry out short term trading strategy as due to sharp price volatility.
• Moving average indicator is mostly only useful in a market that is trending
• Due to rapid price volatility in the market, the moving average indicator can give false signals
• Choosing the wrong period length can have a massive negative impact on the signal generated by the moving average indicator.

Conclusion

When it comes to technical analysis, moving average is one of the technical indicators that is commonly used by a lot of traders and investors to smooth out noise on the price chart and to better understand the direction of the market. A moving average indicator compares the latest prices of any cryptocurrency asset with the average price of that cryptocurrency asset during a specific time period. A lot of traders make use of the moving average indicator to identify trends in the market and also buy and sell signals. When used on the right timeframe and period length, the moving average indicator is a very powerful indicator to identify and confirm trends, get support and resistance levels and buy and sell signals.