WHAT ARE MOVING AVERAGES
Everyone uses moving averages. There are various methods to use them. Before getting into those, let’s see what these are.
Moving average gives you the average price of a stock over a particular time period. This is generally used as a technical indicator. For example, if you are using a 100-day moving average, at some particular day on the average line, you can see the price of the preceding 100-day moving average.
These averages can also operate as assistance and resistance ranges. But it doesn’t provide the actual buying and selling levels. These are being used by many traders, which is why these averages work as support and resistance.
TYPES OF MOVING AVERAGES
There are two types:
- Simple Moving Average: SMA is a simply calculated average and is straightforward. In this, a number of most recent closing prices are added and divided by the same number. Consequently, new averages are created daily and are connected to the consecutive ones. This produces a single flow line.
- Exponential Moving Average: EMA has a much complex calculation. For the calculation of EMA, SMA is a primary need. SMA till the last day is taken as the first EMA for the current day. EMA responds rapidly to price changes as it consider more weighting to the recent prices.
WAYS TO USE MOVING AVERAGES
There are many methods to effectively use moving averages.
- These help us to recognize stocks that are oversold or overbought. Normally, trends will begin with the stock close by the moving average. You can see a gap forming between price action moving average when the stock is expanded. It is more possible to witness a snap back when the gap is increased.
- It helps in recognizing stocks which are in various trends. When the moving average shows a stable upward sloping trend line, it depicts uptrend. Likewise, a stable downward sloping trend line depicts a downtrend. A levelled or constant rise and fall average shows rangebound. When it forms a pivot and obtain from flat level to the opposing direction, it shows trend reversals.
- It helps in entering trades related to pullback entries. These averages also support pullback entries. When tested, powerful stocks will detain or trade it again.
DISADVANTAGES OF MOVING AVERAGES
- The results are random as it is based on past values and it doesn’t have a predictive nature.
- During a trend reversal, there is a chance for MAs to get mixed up, consequently losing trades.
- MA does not work so well in ranging or disordered conditions.
These are some of the basic things every investor needs to know about MAs.