Crypto Trading with Moving Average || Crypto Academy ||s6W2||~Homework post for professor @shemul21. 19/02/202

Good day my professor of the Steemit Crypto academy. It was good being a part of your class. Shortly I shall provide the answers to the tasks that follows this course.

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Explain your understanding of Moving Average

One of the oldest and helpful technical analysis (TA) tool that's widely used today is the Moving average also known as MA.
In simple terms, a Moving Average is a tool used by technical analysts and investors to know or determine the direction of a trend.
It is called a moving average because you have to keep on calculating it as more price data are made available. The moving average is a factor of the specific data points and the various time periods.
It is also known as a lagging indicator since the previous price action is used to calculate and know the direction of the new one.
Technical analysts use the MA to generate new signals.
We can use calculations on MA to alienate the impacts of random, short-term fluctuations on the price of a cryptocurrency over a particular time.
The MA is calculated by adding up all the data points in a specific period, divided by the number of time periods.
In practice, the MA smooths out short-term fluctuations and pinpoints longer-term trends, helping investors to differentiate actual rate reversals from mere fluctuations.
In summary, Moving average are used to highlight trends. When used with other technical analysis tools, they spot trend reversals, and provide signals.

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what are the Different types of Moving Average? Differentiate Between them.

The three(3) main types of moving averages are;

1. Simple Moving Average
2. Exponential Moving Average
3. Weighted Moving Average
   Let's now discuss them one at a time.

1. Simple Moving Average(SMA)

It's simply a straight forward method used for calculating the price average of a cryptocurrency by considering a set of data.
The SMA is calculated by taking into consideration the arithmetic mean of a given set of values over a time frame. In another word, a set of numbers are summed together and then divided by the number of prices in the set.
Traders and investors use the SMA to know entry and/or exit signals. It also helps to identify support and resistance signals.
The SMA can be computed for different types of prices such as low, high, close, open etc. The SMA depends on past price data for a given period, as such it's seen as a backward or lagging indicator.
Whenever a new candle appears, the SMA shifts its position.
Inorder to generate the SMA, a trader will firstly need to add the prices over a given period of time and divide the total by the total number of periods.

Mathematically,
SMA= (A1 + A2 + ……….An) / n
Where:
A is the average in period n
n is the number of periods

2. Exponential Moving Average (EMA)

The EMA gives more weight to the price points helping it to be more responsive to recent price changes.
Unlike the SMA, an exponential moving average calculates the average of all historical ranges, starting at the specified point. Because of its complex nature, the EMA gives more accurate price prediction in terms of price reversals and sudden price fluctuations.
Inorder to find both short and long term price predictions, it's advised that the EMA be combined with SMA.
To calculate the EMA, you must first compute the SMA over a time period as well as the smoothing factor. Having done that, then

Current EMA = [Closing Price – EMA (Previous Time Period)] x [2 / (Selected Time Period + 1)]

• EMA (Previous Time Period)

3. Weighted Moving Average (WMA)

The WMA gives us a weighted average of recent prices, in the sense that the weighting decreases with each previous price.
Depending on the number of periods in the calculation, the Weighted Moving Average can have different assigned weights.
To concentrate on the most recent data, the price of each bar is multiplied by a weighting factor.
Depending on the price direction, traders and analysts use the WMA tool to generate trade signals. For instance, a price action towards or above the weighted moving average, indicates that you should exit a trade. Whereas, a price action near or just below the weighted moving average, can indicate time to enter a trade.

Mathematically,
WMA=price¹Xn+price²X(n-1)+priceⁿ/[nx(n+1)]/2

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Identifying Entry and Exit Points Using Moving Average. (Demonstrate with screenshots)

To identify the Entry and Exit Points using the Moving average, do the following:

• Configure your chat with two MA indicators, one faster (short period) and the other slower (long period). For the chart below we have used MA 20 (green colour) and MA 100 (red colour)

• Next, identify and clearly establish a trend. It is a downtrend in a situation where the candles are below the MA line, and an uptrend where the candles are above the MA line.
  From the above chart, we can identify two trends. See below:

• Next place a trade from below the uptrend to enter and exit at a convenient point above the formed uptrend; in a downtrend, place a sell order at the top of the beginning of the uptrend to enter, leave by placing an exit below the projected extension of the downtrend. See below:

What do you understand by Crossover? Explain in your words

Moving average crossover
Because moving averages are a lagging indicator, some investors and traders don't base their decisions on MA. In some cases, they use MA as a back up or confidence boaster and will rather wait for a greater signal they generate. This great signal is known as Crossover. Crossovers are aimed at finding the middle of a price action.
Let's consider a combination of two(2) moving Averages say a 50-day MA & a 200-day MA.
As the name implies, crossover occurs when the smallest MA, that is the 50- day(also known as the faster or shorter MA) crosses through ( either above or below) the 200-day( also known as the longer or slower MA).
In a simple Moving average crossover, the signal line is never static. As such MA crossovers can be adaptable to changing market conditions, and in trending markets making MA’s a greatly useful tool for trading choices.
Traders tend to use the crossover system to smoothen entry and exit points. Usually the shorter MA is very close to the entry line than the longer MA because it reacts quickly and is faster. Crossover shows significant shifts in momentum and can indicate changes in either support or resistance levels. As such, crossover do not portray future directions but show trends.
It has been said that following trends can offer the most reward for the least amount of work, and moving average crossovers makes this much more possible.
Even though with a Moving average crossover, traders can take signals that reflect the market strength, it is worthy of note that the crossover comes with its own risk as strategies based on crossover alone is unlikely to work well in the absence of other sources confirmation.With its slower response time comes with loss in rewards.

When entering and/or exiting the crossover system, these two(2) rules should be adhered to;
a. When the faster MA exceeds the slower MA, do buy the crypto. If you're already in position, HODL as long as this condition is met.
b. When the faster MA tends less than the slower MA, then exit the long position.

While MA crossover is a good tool, when it is used along with other basic price chart analysis and indicators, it will improve the accuracy of market analyses.

Explain the limitations of Moving Average

Despite all the usefulness of moving averages, there are limitations as it is not without fault. The limitations includes;

• it does not work properly when used in a sideway market, as Information gotten this time are really not helpful.
• This indicator can give false signals to traders who might want to enter a trade as it deals on only past historical data of the price of an asset.
• To use this indicator, one has to be careful with the use of periods, as using a wrong period for a time frame will only lead to a false signal and wrong trade.
• When it comes to trend reversal, the signal it gives, usually occurs late.

Conclusion

This lesson has reminded me of one of the oldest and useful tools known as moving Average(MA). It is used to spot trends(price actions) and provide good entry and exit signals. It's important that we use crossovers to find the middle of a trend since an MA is a lagging indicator. Having considered and seen the limitations of the MA it is important that they be used with other price indicators like RSI and so on. I am determined to make good use of these modules and look forward to more exciting lessons.

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all screenshots are from TradingView app

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Cc;

@shemul21