Crypto Academy Season 3 Week 5 | Homework Post for Professor @lenonmc21 | Trade with 'Simple and Exponential Moving Averages' + application of 'Fibonacci Retracements'
THEORY (NO IMAGES)
Simple Moving Average
Simple Moving Average (SMA) is a trend indicator used by many traders to determine the movement of price over a given period of time. The simple moving average is very popular because of the numerous strategies attached to it. It is used to calculate the average closing price of an asset over a period of time. It is represented on a chart as line.
Also the simple moving average is used to determine the possible resistance and support of assets. It is important to know that simple moving average sums up the average without considering weight to recent price action.
Exponential Moving Average
Exponential Moving average (EMA) is a type of moving average used on a chart to know the direction of the trend. The EMA unlike SMA is used to calculate the recent price. Its indicator is not lagging like that of simple moving average.
How Simple Moving Average is Calculated
The simple moving average calculates the average closing price of an asset over a particular period of time. For instance if we consider 6 moving average on our chart, say 1Hr chart, then, simple moving average will calculate average of each closing candle for 6hrs.
Given the closing price for the past 6hrs as; $25, $35, $20, $30, $34, $24.
Now sum up all these moving average and divide by 6hrs
》SMA = 25+35+20+30+34+24 ÷ 6
》SMA = 168 ÷ 6 = 28
Therefore the simple moving average is $28.
How Exponential Moving Average is Calculated
The Exponential moving average is calculated by adding the recent closing price of assets to the previous ones. For instance considering 3 exponential moving average closing price for the past 3hrs as; $3.5, $20.2, $3.1
This is the formula one can use;
EMA = (Closing price) (multiplier) + EMA (previous day) (1-multiplier)
Two ways of using SMA and EMA
The EMA and the SMA are used together in determining the trend of an asset on a chart. When SMA(Simple Moving Average) and EMA (Exponential Moving Average) meet at a point on a chart, is called Golden rule and it depict the change in the direction of a trend. Most traders add these two indicators to know the end of the movement, thus either a bullish or bearish asset.
The EMA and the SMA are used on a chart to Know the Support and Resistance zone. Using the SMA and EMA on a chart can help traders to know both support and resistance zone, to help them embark on a good trade. Thus to say, helping them to know how to position themselves to get a good trade.
Difference between SMA and EMA
Simple moving average (SMA) is a technical indicator used by traders to calculate the average closing price of an asset over a period of time. Simple moving average does not consider recent price.
Exponential Moving Average (EMA) is a type of moving average used to calculate the recent price of data. It is also known as weighted moving average, because it gives the weight to recent price.
The calculation of simple moving average is simple. It is done by summing up all the closing price of an asset and divide by its total number. Whilst exponential moving average is a bite complex, where you need to be careful not like the SMA, which uses simple average arithmetic. It is done by using it formula and it quite challenging.
However, the combination of the two are very powerful, especially golden cross that signify reversal trend.
Fibonacci Retracements
Fibonacci retracement is an important technical tool made of series or sequence of numbers, proved useful to traders to calculate the retracements assets after strong impulse. It is designed by Leonardo Pisano.
They are horizontal line on a chart, showing the possible support and resistance zone. The sequence of fibonacci numbers are obtained by adding the previous two numbers. Example, 0,1, 1, 2, 3, 5, 8, 13, 21, 34, 55,...etc These are Fibonacci sequence numbers.
Fibonacci Retracements Ratio
Fibonacci retracement ratio is obtained by dividing the previous number by the next and second number to the right of the sequence
Example,
0/1 = 0,
1/1
1/2 = 0.5
1/3 = 0.333
2/3 = 0.666
3/5 = 0.6
3/8 = 0.375
5/8 = 0.625
5/13 = 0.384
8/21 = 0.380
13/34 = 0.382
21/55 = 0.381
34/89 = 0.617
…….etc
The golden zone is 38.2, 50, 61.8 and the golden ratio is 0.618.
When the price is 50 traders sees it as equilibrium.
PRACTICE (ONLY USE YOUR OWN IMAGES)
Steps Involve In Meta Trade 4 (MT4)
Step1: Launch your Meta Trader 4 (MT4), then click on insert.
Step2: Several indicators will be displayed, but you select simple and exponential moving averages trend indicators. And click on the moving average
Step3: A moving average window will pop up, then you go to select "Method" and click on the drop down to select the simple moving average of your choice and plot the format by changing the color to distinguish from the exponential moving average
Step4: Repeat the process to plot the exponential moving average. Simple moving average is represented by a red line while the exponential moving average is represented by yellow line.
Fibonacci Retracements Bullish Trend
Drawing Fibonacci retracement on a bullish trend, you need to draw it from the starting point or lowest of the move to the highest of the bullish run. Here shows the screenshot.
Fibonacci Retracements Bearish Trend
Drawing a fibonacci retracement for a bearish move, you need to draw from the highest point from where the bearish move start to the lowest point where it begins to retrace.
CONCLUSION
In conclusion i can bodly state that, Moving averages and Fibonacci retracement tools play major role in the financial markets, by picturing a clear view of the current trends to traders in the markets.
Thank you
Cc: professor @lenonmc21