Those who practice Technical Analysis always quote Moving averages. However, they are often put in the background for other indicators. These analysts use moving averages for their own price calculations. I persist in saying that this is a loss for the novice analyst as well as confirmed: the moving averages are as easy to understand as they are expressive. And as such, they make it possible to feel the basic laws of the market. Let's see these rules in action on this same chart of the title IBM which served us for the trendlines discussed before.
There are two moving averages, the simple (explained briefly above) and the exponential. The main difference is that the simple moving average treats every daily price equally. It does not give older or newer data any more importance. On the other hand, the Exponential moving average considers that newer data is more relevant than older data and hence, gives it more weight. As you can see, the green EMA (Exponential Moving average) reacts faster than the SMA as it gives the most recent prices a higher importance. The EMA reacts faster to sudden changes in the price.
A tool that can be used to check the quality of the crossover is the MACD. Please read our next Article in order to learn about the MACD divergence! Do not let the lack of knowledge disempower you as a trader!
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