Moving average is a good way to assess trend and momentum in the market. It is a simple technical analysis tool. It gives you an updated average price. It simplifies the data in the market. Moving average has a fixed time frame like 5 days, 10 days, 50 days, 100 days or 200 days. There can also be a fixed time frame of 1 week.
But how does moving average help market investors? Basically moving averages will help you in understanding trend. It helps both short-term traders and long-term investors. That’s because it can be set for any time frame.
Moving average gives a basic idea about where the market is going. It is generally used to look at the trend of a stock or an index. Besides this, it also helps in looking at support and resistance levels. Moving average is known as lagging indicator. It’s because it reacts to the events that have already occurred. Basically, there are various kinds of moving average but simple moving average and exponential moving average are most common.
For example, to calculate 10 days simple moving average. Look at daily closing price of last 10 days, sum them and divide by 10 (number of days). This way we can find simple moving average for any number of days.
On the other hand, calculation of exponential moving average is little complicated. In this weightage is given to all the days for calculation. Hence calculation of the exponential moving average is usually done on some software or trading platform.
So, which would be better for investors?
When the price of a security or asset is below or above the moving average then its indicator for technical traders to trade. That’s why it is most commonly used to understand market direction, support and resistance levels.
The most popular way to look at moving average is to compare it with the price of share or index. When the price of a security goes above moving average then its an indication to buy. Similarly when a price of a security goes below moving average, then its an indication to “Sell”.
Many traders make their entry or exit strategy based on this. But the question is how moving average tells you about trend reversal or change in trend?
Two types of moving average crossovers are very popular. One is Golden Crossover and second is death crossover.
1) When 50-day moving average intercepts 200-day day moving average from down then the analyst considers it as a big indicator or bull rally. Analyst call this Golden Crossover.
2) When 50-day moving average intercepts 200-day day moving average from above then the analyst considers it as a big indicator or bear rally. Analyst call this Death Crossover.
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