Introduction
The Moving Average or MA is a technical analysis tool that creates a constantly updated average price and unravels the price data. This average price is calculated for a specific time, i.e., short, moderate, or long-term. The use of moving averages in your trading provides several advantages. It can even prove to be helpful in buying stocks.
In this blog, we will discover in detail the ways you can use moving averages to buy stock.
Why Should You Use Moving Average?
A moving average helps in reducing the amount of noise on a price chart. Looking at the direction of the moving average, you can get a simple idea of price direction. If the moving price is upward, the price is moving up. However, if it is angled downward, the price is moving down. If the moving average is moving sideways, the price is likely to be in a range.
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A Moving Average is also considered as support or resistance. During an upward trend, a 50, 100, or 200-day moving average tends to act as a support level. Since the average acts like a floor, the price bounces up off of it.
In a downward trend, the moving average acts as a ceiling. In this scenario, the price tends to hit the level and starts to drop again.
What are the Different Types of Moving Averages?
In the Indian Stock Market, two types of moving averages are commonly used:
Simple Moving Average (SMA)
It is a straightforward method to calculate the average. Here, the five most recent daily prices are added and then divided by five. Every day, a new average is calculated, which creates a continuous line of moving averages.
Exponential Moving Average (EMA)
The EMA uses a weighted approach. It assigns higher weights to the most recent closing prices. When compared with SMA, you can see that the EMA is more responsive to price changes.
Moving Averages as a strategy to purchase stocks
Traders can use moving averages to determine the stocks’ price trend they are interested in. While plotting a single moving average on their trading chart, if they identify the price in an upward direction, it indicates an upward trend. However, a drop below the moving average suggests a downward trend.
To gain a clearer signal, it is advisable for traders to plot multiple moving averages. Combining moving averages with these trend lines enables you to make informed decisions on whether to go long or short on specific stocks.
Conclusion
Moving averages are a useful tool for filtering price fluctuations and identifying trends. Traders must understand their strengths and risks to use them effectively for profitable results.
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