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Moving averages

Moving averages

Did you know that there are various advantages of a stock’s moving average while trading? Watch our engaging video from the #LearnWithUpstox series to know the meaning of moving average and how to practically use it.

Welcome back to a new blog of ‘Learn with Upstox’. There are many types of Indicators. Some are based on momentum, there are some trend strength indicators, some are oscillators. My favourite type of indicator is moving averages. What are moving averages?

 Other indicators like MACD (Moving Averages Convergence Divergence), Bollinger Bands and many more are indicators that are formed from moving averages indicators. Moving averages is very simple. In a stock chart, what moves is the price. The average of this moving price is called the moving average. If you refer to the chart below, you will see the moving average which is the blue colour line. MA or SMA (Simple Moving Averages) both signify the same concept, with no difference whatsoever, so do not get confused.

 Moving averages is an indicator. If you are selecting the indicator on the chart, click on moving averages. You can now change the length. Whatever number you make the length, will denote the way you call it, eg. 9 SMA, 50 SMA and so on. The number you give the length will be how far it is from your moving price. Smaller numbers make the moving average line come closer to the price. 9 SMA would be closer, while 50 is further, making a flatter curve.

 What does this line do? This tells you the support – resistance levels so you can use it to buy and sell. Looking at the image given below, which has a 50 SMA line, you will notice it supporting, then there is a breakdown, heading south, and then it acts as resistance, not letting the market go up, till one unsuccessful breakout and then a successful one.

 In the chart, you will notice the same thing on a daily time frame. It is a 50 SMA line. We see the SMA acting as a support throughout.

 What do you mean by length though? Length denotes the number of candles the average is taken out on. If you are a short-term trader, select the indicator - Exponential moving average instead of weighted moving average. But, if you are an investor from weekly up, then check weighted moving average.

 The chart below has the exponential moving average in black and SMA in blue. Both at length 50. You will notice that there is no major difference. But it is better to depend more on EMA. It gives priority to recent data. So say in 50 EMA, the 50th candle is the most important candle. So, on a daily timeline, the EMA will be based on the day before with more importance than 50 days ago.

 What is DMA? When the simple moving average (SMA) is opened on a daily time frame, it is called DMA (Daily moving average). Similarly, when you open Exponential moving average (EMA) on a daily time frame, it is called DEMA (Daily exponential moving average).

 Now, let’s not forget the last point. Which length SMA or EMA should you choose. Well, 50 moving average is the most important moving average for a mid-term or short-term trader. The 200 moving average is the king of moving averages. It is the last line of defense for bulls and last line of resistance for bears. To conclude, you have to use 50 or 200 MA, on a 5 minute to 1-month time frame.