Learn basic of Moving Average and interpret its signals

What is the Moving Average?

A moving average is a popular statistical calculation used in the security market to analyse price trends and patterns for a particular time period. It is a lagging indicator that smooths out price data in order to determine the underlying trend. Moving averages are valuable tools for technical analysts and traders because they provide information about potential trend reversals, trend strength, and support/resistance levels.

Why are Moving Averages Used?

• Identify Trend Direction
• Shift in Trend Direction
• Identify Trend Strength
• Dynamic Support / Resistance Level
• As a Trailing Stop Loss
• Signals Entry & Exit Point.

Moving Average Concepts ?

Moving Average helps you to distinguish between typical market "noise" and the actual trend direction.

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What are different kinds of Moving Averages available in TSR?

1) Simple Moving Average (SMA)
2) Exponential Moving Average (EMA)
3) Weighted Moving Average (WMA)
4) Double Exponential Moving Average (DEMA)
5) Triple Exponential Moving Average (TEMA)
6) Triangular Moving Average (TRIMA / TriMA)
7) Wilder's Smoothing Moving Average (WMSA)
8) Hull Moving Average (HULLMA)
9) Kaufman's Adaptive Moving Average (KAMA)
10) Displaced Moving Average (DMA)

Though there are dozens of moving averages, the most common moving averages used by technical analysts are simple moving average and exponential moving average.

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Interpreting buy and sell signal using moving averages:

Moving average provides buy or sell signal. A trader can choose whether to buy or sell depending on the crossover of the moving average and the current price lines on a chart.

Long term investors look for a long term moving average and short term traders look for a short term moving average. A buy signal is generated when the security's price rises above its moving average and a sell signal is generated when the security's price falls below its moving average.

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What are commonly used moving averages period?

Their are many moving averages right from short moving average to high moving average but most common of them are 15 days, 50 days, 100 days and 200 days.
Other Commonly Used Period In MA
1) Popular Number - 12, 21, 44, 52...
2) Round Figure - 20, 50, 100, 200
3) Fibonacci Sequence Number - 2, 3, 5, 8, 13, 21, 34, 55...

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How to choose a Moving Average period ?

There is no magical Moving average period. Use of any moving average period will provide similar results. For example both 60 day moving average and 70 day moving average will provide similar results but will give buy/sell signals at slightly different times. The key is to stick to one MA otherwise your trade can get messed up. One of the common ways to choose a MA is to divide the period of interest by 2(two).

For Example, A trader looking at a stock movement for 40 days then he will choose a 20 day moving average is suitable. If you are looking at a stock movement for 20 days then a 10 day moving average is suitable and so on. Generally it is preferable to stick to 15, 50, 100 and 200 days moving averages as they are used by lots of big investors and market reaction to these averages is more likely.

Suitable Moving Average As Per Trading Style

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Disadvantages of Moving Average
Although they are highly simple to use and plot in our system. But like everything, Moving Average do have certain drawbacks to deal with some of the disadvantages of Moving Averages are:

• Moving averages lag the current price since they are the data from the past.
• It's ineffective in the sideways market.
• Since it's slow it misses turning points and trends.

Due to the above shortcoming analysts have designed a more complicated yet effective way to deal with price and moving average. One of them is Exponential Moving Average.

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