Definition:
“ A moving average is simply the average value of data over a specified time period, and it’s used to figure out whether the price of a stock or a commodity is trending up or down. Although simple to construct, moving averages are dynamic tools, because you can choose which data points and time periods to use to build them. For instance, you can choose to use the open, high, low, close or midpoint of a trading range and then study that moving average over a time period, ranging from tick data to monthly price data or longer.”
Moving Average (MA) is a stock indicator that is commonly used in technical analysis. Technical Analysis is more important than Fundamental Analysis. Moving Average is one of the most popular techniques. moving averages that are used in timing a financial market. These averages are employed to detect the direction of the stock price trend and identify turning points in the trend in real time.
Moving Average smooth the price data to form a trend- following Indicator. They do not predict price direction, but rather define the current direction with a lag. Moving Average is primarily the summary of momentum & trend. Moving average reduces the noise in the price and also helps to follow trends.
Popular Time Period Of Moving Average:
- 10 Period MA
- 20 Period MA
- 50 Period MA
- 200 Period MA
Moving Average COMBINATION:
This is the main calculation
| Sr.No. | DAILY | WEEKLY |
| 1 | 10 SMA | 2 SMA |
| 2 | 50 SMA | 10 SMA |
| 3 | 100 SMA | 20 SMA |
| 4 | 200 SAM |
MOVING AVERAGE SETUP FOR:
DAILY INCOME TRADING (DIT)
- I put 10 EMA, 21/20 SMA & 50 SMA on the daily chart.
- If 10 below 20/21 below 50 I consider that stock is trading in the down trend & I focus on short trades.
- If 50 below 20/21 below 10 I consider that stock is trading in the up trend & I focus on long traders.
- Apply your strategy & take your trade accordingly.
TYPES OF MOVING AVERAGE:
The most popular type of moving averages are Simple moving average & Exponential moving average. These moving average uses for identifying the trend of the market.
a. SIMPLE MOVING AVERAGE
SMA is the easiest moving average to construct. The Simple Moving Average (SMA) is calculated by adding the price of an instrument over a number of time periods and then dividing the sum by the number of time periods. The SMA is basically the average price of the given time period, with equal weighting given to the price of each period. Most moving averages are based on closing prices
CALCULATING SIMPLE MOVING AVERAGE
If you plotted a 5 period simple moving average on 1hour chart, you would add up the closing prices for the last 5 hours, then divide that number by 5.
Example:
A 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5. 10+ 11 + 12 + 13 + 14 = 60 (60 / 5) = 12
b. Exponential moving average
Exponential Moving Average can be specified in two ways- as a percent based EMA or as a period based EMA. A percent based EMA has a percentage as its single parameter. A period based EMA has parameters that represent the duration of the EMA.
CALCULATING EXPONENTIAL MOVING AVERAGE
EMA = K * (Current Price – Previous EMA) + Previous EMA
K: The weighting factor the EMA
K = 2/(n+1)
Where:
n = the selected time period
