Moving averages are one of the most popular and easy to use tools available to the technical analyst. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets.
𝐔𝐬𝐞𝐬 𝐨𝐟 𝐦𝐨𝐯𝐢𝐧𝐠 𝐚𝐯𝐞𝐫𝐚𝐠𝐞𝐬:
There are many uses for moving averages, but three basic uses stand out:
- Trend identification / confirmation
- Support and resistance level identification/confirmation
- Generating Buy and Sell Call
The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
The Simple Moving Average is the most popular technical analysis tool used by traders. The simple moving average formula is calculated by taking the average closing price of a stock over the last “x” periods. The Simple Moving Average (SMA) is used mainly to identify trend direction but is commonly used to generate buy and sell signals.
𝐀𝐩𝐩𝐥𝐢𝐜𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐭𝐡𝐞 𝐌𝐨𝐯𝐢𝐧𝐠 𝐀𝐯𝐞𝐫𝐚𝐠𝐞:
- If the Price is above the moving average the trend is UP as long as the angle of the Moving average is ascending (in upwards direction). And vice-versa for a downtrend.
- A Crossover of a short-term MA above the Long term MA Indicates an uptrend continuation or a new trend confirmation, but here also the strength is gained once both the MAs are ascending. And vice-versa for a downtrend.
- If the direction of the MAs are ascending or moving upwards, the MAs will act as a Dynamic Support, and vice-versa for a downtrend.
- When the price crosses a long-term MA for eg, 200MA or 100MA, we may get an early Signal for reversal.
𝑴𝒐𝒔𝒕 𝑰𝒎𝒑𝒐𝒓𝒕𝒂𝒏𝒕 𝒘𝒉𝒊𝒍𝒆 𝒕𝒓𝒂𝒅𝒊𝒏𝒈 𝒘𝒊𝒕𝒉 𝑴𝒐𝒗𝒊𝒏𝒈 𝒂𝒗𝒆𝒓𝒂𝒈𝒆𝒔, 𝑰𝒇 𝒕𝒉𝒆 𝒑𝒓𝒊𝒄𝒆 𝒊𝒔 𝒕𝒐𝒐 𝒇𝒂𝒓 𝒇𝒓𝒐𝒎 𝒕𝒉𝒆 𝒎𝒐𝒗𝒊𝒏𝒈 𝒂𝒗𝒆𝒓𝒂𝒈𝒆 𝒂𝒏𝒅 𝒕𝒉𝒆 𝒂𝒏𝒈𝒆𝒍 𝒊𝒔 𝒂𝒔𝒄𝒆𝒏𝒅𝒊𝒏𝒈, 𝒕𝒉𝒆𝒏 𝒘𝒂𝒊𝒕 𝒇𝒐𝒓 𝒕𝒉𝒆 𝑴𝑬𝑨𝑵 𝑹𝑬𝑽𝑬𝑹𝑺𝑰𝑶𝑵 𝒕𝒐 𝒕𝒉𝒆 𝑴𝒐𝒗𝒊𝒏𝒈 𝒂𝒗𝒆𝒓𝒂𝒈𝒆, 𝒍𝒆𝒕 𝒕𝒉𝒆 𝑴𝑨𝒔 𝒂𝒄𝒕 𝒂𝒔 𝒕𝒉𝒆 𝒔𝒖𝒑𝒑𝒐𝒓𝒕 𝒂𝒏𝒅 𝒕𝒉𝒆𝒏 𝒆𝒏𝒕𝒆𝒓 𝒕𝒉𝒆 𝒅𝒊𝒓𝒆𝒄𝒕𝒊𝒐𝒏 𝒘𝒊𝒕𝒉 𝒂 𝒃𝒆𝒕𝒕𝒆𝒓 𝑹𝑰𝑺𝑲-𝑹𝑬𝑾𝑨𝑹𝑫.
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