Regarding technical analysis, moving averages are the most commonly used indicator. Many indicators are based on moving averages; the Moving Average Convergence Divergence (MACD) is one of the most prominent (MACD).
By averaging price changes, the moving average aims to smooth out the price by creating a single line that fluctuates with the market. It is a “lagging” indication, depending on the previous pricing. It is often used as part of a system and as a support/resistance line in its own right.
Some traders favor the EMA (exponential moving average). It differs from the SMA in that it has multiplicative components that give greater weight to current data points than to past data. As a result, price changes will be reflected more immediately in the EMA. In comparison to an SMA, this can provide an early indication.
Moving averages shifted by a predetermined number of periods are known as displaced moving averages. If this “shift” occurs, the average price will be shifted to one side or the other.
Traders utilize the process of shifting a moving average to better match the moving average to the price activity.
There are instances when the price closes just above or below the trend line, and we have all been there ourselves. Because how many times have you seen prices revert in the significant trend direction after exceeding the average?
In this case, the displaced average plays a significant role. A fixed number of periods would be required to determine which displaced average best reflects the price activity.
In addition, I would want to clarify that there is no ideal setup. If anything, you will have to adjust the average’s displacement based on the level of security in your environment.
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