The moving average is a straightforward technical analysis tool that makes a repeatedly updated average price to smoothen out price data.
The trader can decide the time duration for which the average is taken. Moving average trading strategies are well can be customized to any time frame, fitting short-term traders as well as long term investors of share market.
In order to get a clear cut idea about the price movement, you need to see the direction of the moving average.
As the MA is sloping up and usually the price is moving up or it is sloping down and usually the price is moving down, the price is in all probability in a range.
What are the different types of Moving averages?
Moving averages in addition can act as a resistance or support.
The moving average acts like a support in a stock market uptrend so that the price bounces off it to a higher level.
In the same way in a downtrend it acts as a resistance so that the price touches it and drops down.
Simple moving average (SMA) is calculated by taking the simple average of the last five days.
Exponential moving average (EMA) is a little composite. On the other hand, it gives weight to the recent closing prices.
Moving average length
Based on the online trading strategy, Average lengths ranging from 10 to 200 are applied to the timeframe of any chart.
The timeframe that is selected plays a vital role. An MA with short timeframe will react quicker than a moving average with a long timeframe.
Crossovers are one of the main approaches of the moving average.
Price crossover occurs when the price crosses below or above an MA to point out a likely trend change.
An intraday trading strategy includes MA too.
A golden cross is a buy signal due to the trend shifting up. We see it from a chart of two moving averages, when the shorter one crosses over the longer term.
A dead cross is found from a similar chart when the shorter MA crosses below the longer term one, signaling a downtrend.
It is important to note that the moving average is calculated on historical data and the results might be unsystematic at times.