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How Can 10-day Moving Average Make Investments Smarter

20 Sep 2023

Various tools and indicators are used in the realm of technical analysis and stock markets by investors and traders so that they can make informed decisions. The 10-day moving average is one such tool. It can be used to understand the trends and patterns of asset prices. 

What is a Moving Average?

To understand the 10-day moving average, we must know what a moving average is. Simply put, a moving average is a statistical calculation that can be used to analyze data values over a period. This data can be plotted to create a smoothened graphical representation. When this is applied to the financial landscape, the moving average becomes the average price of an asset over a given period. 

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What is the 10-day Moving Average?

The 10-day moving average is the calculation of the average closing price of an asset over the last 10 days. This is a simple moving average (SMA) because equal weight is given to all the 10 data values. When the trader moves on to the 11th day, the data value of day 1 is replaced with that of day 2 to accommodate the new data value.

How Do I Calculate the 10-day Moving Average?

This simple moving average is calculated by adding up ten closing prices and dividing them by 10. If x is the sum of closing prices over the last 10 days, then the 10-day moving average is 

10-day moving average = x/10

Why is the 10-day Moving Average important?

Here’s why the 10-day moving average can be useful for traders:

  1. Price Data Smoothening: Smoothening the price trends helps silence the noise in the data and hash out short-term fluctuations. 
  2. Crossovers: The 10-day moving average gives signals in the case of crossovers. The price crossing above the average signals a buying opportunity and vice versa.
  3. Measurement of Volatility: It can be used to figure out the market volatility. If there is a frequent and rapid change in the average, this signals high volatility and vice versa. 

Strategies Facilitated by the 10-Day Moving Average

Here are some strategies to implement using the 10-day moving average:

  1. Trend Confirmation: 10-day moving averages are compared to long-term moving averages to confirm whether there is a strong uptrend or downtrend.
  2. Golden Cross: When asset price goes over the 10-day MA, a golden cross is said to have occurred and can be interpreted as a bullish signal.
  3. Death Cross: When the price drops below the 10-day MA, it is seen as a bearish signal. 
  4. Stop-Loss Placement: You can use 10-day MAs to set a stop-loss level. If a death cross occurs, it can trigger the stop-loss protocol and protect you from further losses. 

 

Related Articles: What is Alpha in Stocks | What is After Hours Trading | What Are Call and Trade Auto Square Off Charges | What is trading on equity

 

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