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Chapter 1 · Chapter 1 - Introduction to the System, Risk Management, FAQs
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SMA/EMA Alpha

2 min read · 379 words

The goal of a moving average is to show the average value of an asset, calculated based on a period of time. That way, it helps smooth out the price data by creating a constantly updated average price and therefore helps you to identify the trend direction of a crypto, a stock, an asset.... It is a trend-following-or lagging-indicator because it is based on past prices.

A rising moving average indicates that the security is in an uptrend, while a declining moving average indicates that it is in a downtrend.

You have different kind of Moving Average, with the most commonly used being

  • ●SMA (Simple Moving Average), that are taking the arithmetic mean of a given set of prices over the specific number of days in the past; for example the ones I'm using the more like 100 or 200 days (or 100, 200 H4, H1, etc...).
  • ●EMA (Exponential Moving Average), that is a weighted average that gives greater importance to the price of a stock on more recent days. That explains why EMA are more aggressively responding to price action than "smoother"/"simpler" moving averages.

The longer the time period for the moving average, the greater the lag.

The calculation behind a few Moving Averages is very simple

  • ●SMA = (N1+N2+…+Nx) / x

​where

N = average in period n

x = number of time periods

  • ●EMAt = [Vt × ( s / ( 1+d ) ) ] + EMAy × [ 1 − ( s / (1+d) ) ]

where

EMAt = EMA today

Vt = Value today

EMAy = EMA yesterday

s = smoothing

d = number of days

Note: Moving Averages are indicators. They are nothing more than that. They are very useful to smooth a chart, to highlight trend and especially shift in trends but they remain indicators. They have a big part in my trading system but there is nothing magical about them. There are not magic EMA/MA, no magic crosses whatsoever. They're only math and a way to smooth the chart/price over time and give a "cleaner" idea of a trend. Keep this in mind please, it's important to always understand they're only indicators. Very useful ones when used correctly, but just indicators at the end of the day.

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