Stock or index analysis involves a number of methods to determine its price outlook. The Moving Average Moving Average is a technique used in technical analysis to measure the average value of a security over a specified period of time. The trend is considered bullish when the current price of the security is above its moving average. The sentiment is said to be bearish when the price falls below the average.
The most effective moving averages are the 50 day moving average, or 50 DMA, 100 DMA and 200 DMA.
Many moving averages are also known as simple moving averages. Combinations of these moving averages indicate substantial movement in a stock price.
Intra-day traders consider lower averages, such as 9 DMA, 13 DMA, 20 DMA, as they help them capture profits on a day-to- day basis while helping them mitigate the risk.
The major moving average is 200 DMA from a broader perspective. The long-term investors are attracted to the idea of trading above or crossing 200 DMA on monthly charts, resulting in a steady up trend thereafter.
A moving average technique that is used by traders and investors is the exponential moving average. The difference between the two is that while simple moving averages give equal weightage to all data points, exponential moving averages apply more weight to recent data.
Exponential moving average EMA considers the weighted average of a series of recent data to reflect the current trend in the market. The weight of the EMA tilts towards recent occurrences.
The swing profit is reflected by the change in move and the exponential moving averages facilitate trading when you try to make a quick profit.
Technical analysts use a moving average to keep track of price trends for specific securities. An upward trend in a moving average could signify an upswing in the price or momentum of a security, while a downward trend would be seen as a sign of decline.
Now that we have clarity of the meaning and significance of moving averages, let us understand how to use the same while trading or making investment decisions.
The crossover of moving averages is recognized as a trading signal. The changes in sentiment that affects the prices are a reflection of this.
One of the cross over techniques of moving averages is the golden cross pattern. Here, the smaller moving average crosses over the larger moving average.
As can be seen in this chart for Berger Paints, the 50 DMA has made a positive crossover with 200 DMA, which indicates a bullish outlook.
A death cross gives a negative outlook as and when the 200 DMA falls below the 50 DMA.
Moving averages can help in filtering out unwanted noise and giving a clear view on the underlying index or stock.