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in this video we are going to cover moving averages and well look specifically at exponential moving averages this video is for people who are new to trading and who are not familiar with moving averages we are going to talk about what moving averages are and detail how they are calculated this will give you enough information to know what the EMA 12in EMA 26 overlays mean on the price chart in G decks a moving average is a general method of summarizing numerical values over time we have already seen that candlesticks do this with prices over time giving us open high low and closed values for each period and moving averages are combined with candlesticks to give us another value for each of these periods in addition to open high low and closed values with moving averages we get an average for each period and this average is said to be moving because it is calculated using a sliding window when a new time period begins the window slides forward and a new candlestick is generated the candlestick and average are both updated as new trades come in this is how the average moves over time each time we get a new candlestick we get a new average value we are going to discuss the three things you need to know to understand moving averages number one is the length of the window number two is how the values in the window are averaged and number three is which values in the window are averaged when we look at which values are averaged we will also consider how this summarizes the trade history lets jump over to GX and get into the details well start out by adding a moving
average to the chart G Dax gives us two options EMA 12 and EMA 26 will use EMA 12 for our discussion but everything we talked about will easily generalize to EMA 26 or any other EMA that we could think of the first thing to notice is that the line is moving with the price even though the line is solid the values are discrete each candlestick now has an EMA 12 value associated with it these values can be represented using dots or any other kind of shape that we could put on the graph however we have a line and we can think of this line as just connecting the dots at each candlestick at each candlestick the EMA 12 value gives us an average price and the 12 tells us the length of the window used to calculate this average price the 12 reveals that the window starts at the current candlestick and moves back by 12 periods in our case each period is one day so we can call this moving average a 12 day moving average if we had minutes selected for our periods we would say this is a 12 minute moving average so the number in the name is the length of the window G Dax is very restrictive here most platforms allow traders to select the size of the window opposed to having this fixed selection the 12 allows us to realize that even though the price has been moving a lot over the last 12 days it has roughly been around whatever the average is for the EMA 12 so we dont actually get a reading we can just estimate so if we hover we can see that the average price over the
last 12 days has been roughly $8,700 us when a new period begins the last value in the window drops off and a new value is added at the start of the window all the while theres always 12 values in the window so the twelfth value will get kicked out and a new value will be added at the front of the window this is how the average moves over time so thats all I wanted to say about the window the next thing to discuss is how the values in the window are averaged to kick this off lets continue breaking down the EMA twelve we know that the, 12 defines the length of the window the MA means moving average which tells us that there is a window the e stands for exponential and this term tells us how the values in the window are averaged the normal average that most of us are used to is a uniform average this so-called uniform average is usually called SMA or simple moving average and it means that every value in the calculation has the same weight or influence on the average exponential moving averages provide a specific way of shifting the weight of the values exponential moving averages that give higher weights to values in the front of the window and this means that prices that have occurred more recently get higher weights this pulls the average in their direction when the calculation is performed the last thing that we actually need to discuss is which values are used in the calculation we know that the values have occurred more recently have more weight but which values are actually being used GDX doesnt tell us this but we are safe to
assume that the values being used are the closing prices of each period this is the convention when doing these calculations for our example we are using the EMA 12 and so we can start at the latest candlestick and find all the closing values going back by 12 candlesticks and this will give us the values that were used to calculate the EMA 12 moving average some platforms will give us the ability to use other values like maybe the open or the high or the low but the convention is to use the clothes we now have enough knowledge to fully understand what the EMA 12 is telling us if we look at the EMA 12 value at any candlestick we know that this value gives us the average closing price starting at that candlestick and going back by 12 candlesticks we also know that the calculation is using exponential weighting which means more weight is given to more recent candlesticks before we conclude I want to consider what these facts mean in terms of summarizing historical price action when we say historical price action we are ultimately referring to the trade history most of the time we are looking at a candlestick chart which means we arent actually looking at the trade history but a summary of the trade history and like we have just seen most moving averages are applied to closing prices of candlesticks the moving average is a summary of the candlesticks which are a summary of the trade history this means that moving averages are losing further information about the actual trading activity moving averages use a single price the closing price for each time period in their calculation even though there are many trades with
in each period moving averages also do not include volume which is a primary piece of information in the trade history if we look at this candlestick for example we can see that a relatively large number of Bitcoin traded here as represented by the larger volume bar but that has no effect on the moving average calculation only a single trade from this period acted as a representative for the whole period in the moving average calculation thats all I wanted to say about moving averages for now this information should equip you with a general understanding of moving averages in how to interpret what information they are conveying there are three important takeaways from this discussion number one is that moving averages are calculated using sliding windows in G decks we dont have the ability to select the length of the window but in most platforms we do have the ability to select any window of our choice number two is that there are many different types of moving averages we touched on two of these types we saw that simple moving averages are calculated using uniform weights while exponential moving averages are calculated using weights that give more influence to values that occur more recently in time number three is that moving averages give us a summary of the trade history they represent the average price in the trade history for a particular time period its important to realize that volume is not included in the moving average calculation and its also important to realize that for each period theres only a single price which is the closing price that acts as a representative of all of the prices that occurred in that period when the moving average is calculated
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