Crypto Academy Season 3 Beginners’ Level - Homework Post for WEEK 5: [TRADE WITH "SIMPLE AND EXPONENTIAL MOVING AVERAGES"+APPLICATION OF "FIBONACCI RETRACEMENTS" ON THE CHART] by @reddileep for Professor lenonmc21
HOMEWORK WEEK 5
Entire Question
Theory
Define in your own words what are simple moving averages and exponential moving averages.
Explain how simple and exponential moving averages are calculated
Briefly describe at least 2 ways to use them in our trading operations.
What is the difference between simple moving averages and exponential moving averages (Explain in Detail)
Define and explain in your own words what "Fibonacci Retracements" are and what their gold ratios are
Practice
It shows step by step how to add a "Simple and Exponential Moving Average" to the graph.
Use "Fibonacci Retracements" to chart a bullish and bearish move.
Generally, a moving average can be defined as an average view of a selected price range. It is a simple line that moves according to changes in the market price. If we see on a candlestick chart directly, we can see a lot of candlesticks patterns and sometimes it can be difficult to identify correct trend. Therefore, most basic or professional traders are still using these moving averages to analyse charts. Actually, here we mostly consider the closing prices of each candle. Further, according to the accuracy of the price movements, mainly there are two types of moving averages.
- SIMPLE MOVING AVERAGE (SMA)
- EXPONENTIAL MOVING AVERAGE (EMA)
- SIMPLE MOVING AVERAGE (SMA)
Simple moving averages are calculated according to a specific time period like 5 days or 10 days. Also, it is calculated by the sum of the closing prices of each day divided by the selected period. Below I've explained it through a simple example.
Here I've selected Tron (TRX) Coin and 5-Days moving average over 2 days. So, according to the USD value of TRX, the daily Closing Prices of TRX are 0.05, 0.06, 0.061, 0.062, 0.063, 0.062
Then we can calculate 5-day SMA for the first day - (0.05, 0.06, 0.061, 0.062, 0.063) / 5 = 0.0592
Something special happens when calculating the second day. Let's move to the second day,
5-day SMA for the second day - (0.06, 0.061, 0.062, 0.063, 0.062) / 5 = 0.0616
Now above we can see a new date closing price (0.062) has been added for the calculation and also the previous date closing price (0.06) has been removed for the second-day calculation. This way the SMA will only get the closing price with the relevant time period.
- EXPONENTIAL MOVING AVERAGE (EMA)
Same as previously, Exponential moving averages are calculated according to a specific time period like 5 days or 10 days. Also, it is calculated by following several steps. First of all, we should find SMA as the previous period's EMA (the sum of the closing prices of each day divided by the selected period.) Then we should calculate the weighting multiplier. Finally, we can use the formula to calculate the current EMA. Below I've explained it through a simple example.
Here I've also selected Tron (TRX) Coin and 5-Days moving average. So, according to the USD value of TRX, the daily Closing Prices of TRX are 0.05, 0.06, 0.061, 0.062, 0.063
Then we calculate the initial SMA - (0.05, 0.06, 0.061, 0.062, 0.063) / 5 = 0.0592
After that, we can find the Multiplier using the following formula.
[2 ÷ (number of observations + 1)]
According to my example - [ 2 / (5 + 1) ] = 0.333 (33.3% as a percentage)
Finally, we can use the following formula to calculate the current EMA.
EMA = [ Closing price - EMA(previous day) ] x multiplier + EMA(previous day).
TO IDENTIFY THE TREND OF THE MARKET
We all know that if we see on a chart directly, sometimes it is a bit difficult to identify the trend of a volatile market. Because if we use a candlestick chart, there are a lot of candles on the chart and we have to analyze it well to identify the trend of the market.
If the price goes below the EMA line, it can be called a downward momentum. It means the price of the market can be reduced. And also if the price goes above the EMA line, it can be called an upward momentum. It means the price of the market can be increased.
TO IDENTIFY SUPPORT AND RESISTANCE LEVELS
We can use these moving averages as a support line and resistance line. If the prices moving above the moving average and it tries to touch this moving average line several times, we can identify this moving average line as a support line. And also, if the prices moving below the moving average and it tries to touch this moving average line several times, we can identify this moving average line as a resistance line. Therefore, we can take decisions according to these support and resistance levels.
As an example, if we need to place a Stop-Loss order. These moving averages can be useful most of the time. because, when we identify the support line according to the moving average line, we can select a point below the support line as a stop loss to our buy long orders.
In a trend, we can see a lot of price data. So, Exponential moving averages mostly support recent price data compared to Simple moving averages. Therefore, the accuracy of the latest price movement can be higher in the Exponential moving average.
When prices go up or down unnecessarily, we have to be careful about using Exponential moving averages. Because it can cause to receive false signals as it considers the most recent prices. Therefore, simple moving averages are more useful for such a market as it sends overall average signals.
When we trade for long term durations, Simple moving averages can be more useful than Exponential moving averages. Because the price of the market can be volatile due to higher selling or buying orders. Therefore, Exponential moving averages can be a little confusing to take decisions. Therefore, we can use Simple moving averages as it shows a clear line to identify the future trend of the market.
- WHAT ARE FIBONACCI RETRACEMENTS
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377......
Here we can consider 0 and 1 as the starting number and the remaining numbers are formed by adding the previous two numbers together. So, we can see if we skip the first "0" and "1", the next number "1" has been created by 0+1 = 1. Again next "2" has been created by 1+1 = 2. Then if we consider "144", it has been created by adding 55 and 89. In this way, it is created to infinity.
- WHAT ARE THEIR GOLD RATIOS
There are some amazing mathematical features among the sequences explained above. That is, we get a special number when we divide any number by the number before it. As an example, if we divide "377" from "233", we can get the answer "1.6180". Also, although the accuracy of the first numbers is slightly lower, the accuracy will increase as we go along forward numbers. This number is 1.618 and we call it the "golden ratio". Further, the golden ratio usually converts into three percentages like 38.2%, 50% and 61.8%. So, this zone between 38.2% and 61.8% can be defined as Golden Zone.
- HOW TO ADD SIMPLE MOVING AVERAGE ON CHART
Here I've used TradingView site to demonstrate my steps in adding SMA to a chart.
STEP 1
First of all, we can select any currency pair to open the chart. So, I've selected BTC/USDT pair to open my trading window. We can do it by typing any currency pair on the search bar. Then, click on "launch chart". Below I've attached a screenshot to get an idea.
STEP 2
Now, we can click on "Indicators & Strategies Icon" from the top tools panel. (check the bellow attached image to get an idea)
STEP 3
After clicking on "Indicators & Strategies Icon" we can see another window open which consists of Indicators & Strategies. Then we can type "Moving average" on the search bar. Further, we can see a lot of moving average indicators created by Technical Analysts. However, we can select a simple moving average indicator as we can customize it according to our needs. Below I've attached an image to explain it well.
STEP 4
Now we can customize this simple moving average according to our choice. To do that, we have to click on the setting icon like the below-attached image.
STEP 5
After clicking on the "settings" icon, we can see the MA Popup window. So, we can select "Inputs" to change Length, Source and Offset. So, here I've entered 50 as the length of this moving average. Finally, we can click on "ok" to apply these changes. (Check the bellow attached image to get an idea)
- HOW TO ADD EXPONENTIAL MOVING AVERAGE ON CHART
Here I've used TradingView site to demonstrate my steps in adding EMA to a chart.
STEP 1
Same as previously, we can click on "Indicators & Strategies Icon" from the top tools panel. (check the bellow attached image to get an idea)
STEP 2
After clicking on "Indicators & Strategies Icon" we can see another window open which consists of Indicators & Strategies. Then we can type "Moving Average Exponential " on the search bar. Further, we can see a lot of customized Exponential moving average indicators created by Technical Analysts. However, we can select the Moving Average Exponential indicator as we can customize it according to our needs. Below I've attached an image to explain it well.
STEP 3
Now we can customize this Exponential moving average according to our choice. To do that, we have to click on the setting icon like the below-attached image.
STEP 4
After clicking on the "settings" icon, we can see the EMA Popup window. First of all, we can change the colour of the EMA line as we have both SMA and EMA lines in the same colours. Therefore, we can change the colour of the line from the " Style" menu. Then, we can select "Inputs" to change Length, Source and Offset. So, here I've entered 200 as the length of this Exponential moving average. Finally, we can click on "ok" to apply these changes. (Check the bellow attached image to get an idea)
Finally, we can see both SMA and EMA together in the chart. So, we can take decisions by analysing these indicators. However, we have to be careful when using these indicators. Because it is difficult for us to confirm our profits just by observing these indicators and conclusions can be wrong Unexpectedly. Below I've attached an image of both indicators and I've highlighted SMA and EMA separately.
- FIBONACCI RETRACEMENTS FOR A "BULLISH TREND"
If we want to identify Retracements levels in an uptrend, we can use swing lows and swing highs. It means “minimum” point and “maximum” point. So, in between them, we can draw the Fibonacci Retracements indicator. Then we can easily identify the Retracements levels according to our requirement.
After identifying the correct uptrend (Bullish) movement and correct minimum point and maximum point, we have two methods to draw the Fibonacci Retracements indicator. One is to choose the lowest point of the swing low and the highest point of the swing high. It means, we can use the bottom of the candle wick to the top of the candle wick. The second method is to use the candle close point of each point. It means, we can use the bottom candle close point to the top candle close point. Here I've used the wick to wick method as I personally use it for trading.
Below I've explained it step by step using TradingView site.
STEP 1
As I explained earlier, we should find a correct uptrend and correct minimum point and maximum point. Then we can select the Fibonacci Retracements indicator from the left tool panel. And also we can press Alr+F as a shortcut to select the Fibonacci Retracements indicator. Below I've attached an image to get an idea of this step.
STEP 2
Now we can draw the Fibonacci Retracements indicator from the minimum point to the maximum point. Also, here I've customized the indicator and added 65.0% Fib Retracement level to the 61.8% Fib Retracement level to get Fibonacci Golden Pocket. According to my experience, it is working as the most respected reversal zone and below we can see it in my example. Further, we can see how this indicator has worked to protect the price level and to Drop the price level.
- FIBONACCI RETRACEMENTS FOR A "BEARISH TREND"
If we want to identify Retracements levels in a downtrend, we can use swing Highs and Swing Lows. It means “maximum” point and “minimum”. So, in between them, we can draw the Fibonacci Retracements indicator. Then we can easily identify the Retracements levels according to our requirement.
After identifying the correct downtrend (Bearish) movement and correct maximum point and minimum point, we have two methods to draw the Fibonacci Retracements indicator. One is to choose the highest point of the swing high and the lowest point of the swing low. It means, we can use the top of the candle wick to the bottom of the candle wick. The second method is to use the candle close point of each point. It means, we can use the top candle close point to the bottom candle close point. Same like previously, Here I've used the wick to wick method.
Below I've explained it step by step using TradingView site.
STEP 1
As I explained earlier, we should find a correct downtrend and correct maximum point and minimum point. Then we can select the Fibonacci Retracements indicator from the left tool panel. And also we can press Alr+F as a shortcut to select the Fibonacci Retracements indicator. Below I've attached an image to get an idea of this step.
STEP 2
Now we can draw the Fibonacci Retracements indicator from the maximum point to the minimum point. Also, here I've customized the indicator and added 65.0% Fib Retracement level to the 61.8% Fib Retracement level to get Fibonacci Golden Pocket. This time it is working as a resistance zone and here I've highlighted it from red colour. Specially, we can see 38% Fibonacci Retracements line has worked as strong resistance to the market price.
At present most traders are using moving averages to analyse charts. Therefore, moving averages are doing a significant contribution to the trading process. Especially, Fibonacci Retracements indicators are very important tools to get accurate signals for our day to day trading process. However, we can't depend on these indicators completely as they may not always work. Further, we can use these indicators to keep our money safe. As an example, we can create a stop-loss point according to these indicator signals, we can get the entry point or exit point according to these indicator signals. Therefore, these indicators are essential tools for every professional or amateur trader.
This is all about my homework and I really appreciate Professor @lenonmc21 for your valuable lesson and your dedication to creating a very essential lesson for us. Usually, this lesson is really important to my life as I am still trading in the cryptocurrency market.
Thank you..