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EMA12 and EMA26

Overlays EMA12 and EMA26

Moving averages are combined with candlesticks to give us another value
- for each of these periods.
In addition to OHLC values, with moving averages, we get an average for each period.
This average is said to be moving, because it is calculated using a Sliding Window.
Moving averages are 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

When we look at which values are averaged,
- we will also consider, how this summarizes the trade history.

He points to the Overlay button on the Trade screen,
- which then displays a submenu for EMA12 and EMA26
- He selects EMA12

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 EMA12 value associated with it
These values could be represented using dots, however we have a line.
- Think of this line as just connecting the dot at each candlestick

The 12 (in EMA12) 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 this case, each period is one day, that you set on the Trade Screen
We can call this moving average a 12 day moving average.

If we had minutes selected for our period, you can call this a 12 minute moving average.

The number and the name is the link of the window
Other applications allow you to pick the length of the window
- Coinbase Pro only gives you the two windows of 12 and 26

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 EMA12.
We don’t actually get a reading, we can just estimate
- so if we hoover (by moving the cursor to the first period)
- we can see that the average price of the last 12 days has been roughly 8,700 dollars

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, there are always 12 values in the window
- so the 12th value will get taken out,
- and a new value will be added at the front of the window.

Looking at the symbol EMA12,
- we know that the 12 describes the length of the window
- the MA means Moving Average – that tells us that there is a window
- the E stands for Exponential – this term tells us
  - how the values in the window are averaged

The normal average that most of us are use to, is a uniform average
The Uniform Average is known as an SMA – Simple Moving Average
- that means that for every value in the calculation, has the same weight
- or influence on the average
- Example: SMA4: (v1)(.25) + (v2)(.25) + (v3)(.25) + (v4)(.25)

Exponential Moving Averages provide a specific way of shifting the weight of the values.
Exponential Moving Averages gives higher weight to values in the front of the window.
This means that prices that have occurred more recently, get higher weight.
- Example: SMA4: (v1)(.25) + (v2)(.25) + (v3)(.25) + (v4)(.25)
- Example: EMA4: (v1)(.75) + (v2)(.10) + (v3)(.03) + (v4)(.02)
This pulls the average in their direction when the calculation is performed.

We know that the values that have occurred more recently have more weight
- but which values are actually being used.
It still might be that Coinbase doesn’t tell us this,
- but its safe to assume that the values being used, are the closing prices of each period
  - OHLC (Open, High, Low, Closed)
  - it’s the Closed value that they are using

This is the convention when doing these calculations
For our example, we are using the EMA12
- 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 EMA12 moving average

Some platforms will give us the ability to use other values
- like the open, or the high or the low
But the convention is to use the Close

We now have enough knowledge to fully understand what EMA12 is telling us
If we look at the EMA12 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
- Note, the same Trade History panel from the Trade Screen
Most of the time, we are looking at a candlestick chart, which means
- we are actually looking at the trade history, but a summary of the trade history
And like what 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 varying prices 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 bitcoins 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.

This concludes our discussion of moving averages
- and what information they are conveying.