what is the advantage of using 'averages'?
Answers
As the most basic measure in statistics, arithmetic average is very easy to calculate. For a small data set, you can calculate the arithmetic mean quickly in your head or on a piece of paper.
Answer:
A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random short-term price fluctuations.
Simple moving averages (SMA) take the arithmetic mean of a given set of prices over the past number of days, for example over the previous 15, 30, 100, or 200 days.
Exponential moving averages (EMA) use a weighted average that gives greater importance to more recent days to make it more responsive to new information.
Understanding Moving Averages (MA)
Moving average is a trend-following, or lagging, indicator because it is based on past prices. The most common applications of moving averages are:
to identify the trend direction
to determine support and resistance levels.
While moving averages are useful enough on their own, they also form the basis for other technical indicators such as the moving average convergence divergence (MACD)
The two basic and commonly used moving averages are the simple moving average (SMA), which is the arithmetic average of a security over a defined number of time periods, and the exponential moving average (EMA), which gives greater weight to more recent prices.
The simplest form of a moving average, appropriately known as a simple moving average (SMA), is calculated by taking the arithmetic mean of a given set of values. In other words, a set of numbers, or prices in the case of financial instruments, are added together and then divided by the number of prices in the set.
The exponential moving average is a type of moving average that gives more weight to recent prices in an attempt to make it more responsive to new information. Learning the somewhat complicated equation for calculating an EMA may be unnecessary for many traders, since nearly all charting packages do the calculations for you.
The formulas for the two most common moving averages are:
Simple Moving Average (SMA) - calculates the arithmetic mean of a security over a number (n) of time periods, A.
\begin{aligned} &SMA = \frac{A_1 + A_2 + \dotso + A_n}{n} \\ &\textbf{where:}\\ &A=\text{average in period }n\\ &n=\text{number of time periods}\\ \end{aligned}
SMA=
n
A
1
+A
2
+…+A
n
where:
A=average in period n
n=number of time periods
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