Moving average is a strategy that is very simple to understand for a beginner. The moving average is a very useful strategy for technical analysis. It is One of the most important and very well-known indicators in stock market. It is widely used by the traders in the share market.
What is a moving average?
The moving average is nothing but the average of closing prices of the past few days. The range of days can be any, whichever we may select. It is just a line that has all the averages connected by a line. The word moving describes that the average is moving. It means that the average moves as the next days get added to it. the price of next the day is added to it and the price of the past one day is removed at the same time. Lets understand it by the example given below.
Example-
Here are some numbers.
day 1 | 5 |
day 2 | 10 |
day 3 | 12 |
day 4 | 9 |
day 5 | 13 |
day 6 | 8 |
day 7 | 17 |
day 8 | 20 |
day 9 | 21 |
day 10 | 22 |
day 11 | 27 |
day 12 | 17 |
day 13 | 20 |
day 14 | 25 |
day 15 | 30 |
day 16 | 35 |
day 17 | 32 |
day 18 | 28 |
day 19 | 22 |
day 20 | 40 |
Here we have days and I have written any random numbers in front of these days. If we have to calculate the average of 5 days, we will add the numbers of the first 5 days and we will divide it by 5. We will get the average of first 5 days by this method. lets do it.
5+10+12+9+13 /5 = 49/5 = 9.8. The averge of first 5 days is 9.8. If we have to calculate the moving average of 5 days, we will get average of first 5 days as 9.8. We will add the number of day 6 and remove the number of day 1. Means average of day 2 to day 6. 10+12+9+13+8/5= 52/5 = 10.4 . Now we will add the day 7 in the average and remove the day 2. 12+9+13+8+17/5=59/5= 11.8 . This cycle will go on until we add more numbers to it. The numbers can go for many days and the average will go on. If we join all the points we will get a line which is nothing but the moving average
For the practice you can use the numbers above and calculate the moving average for all the above numbers.
How to use Moving average for trading in share market?
Now we are clear with the determination of moving average. we know how it is calculated the softwares today have made our lives simple and now we get the moving averages directly plotted on the chart.
We will see some basic strategies for different time horizons.
medium- long term
By medium- long term I mean for 6 months to 1 year. In some cases, it can last for more.
For this time horizon, we will take 2 moving averages. first plot a moving average of 200 days. Then plot the moving average of 50 days. The reson behind it is very simple that a 200 day moving average can be considered as the moving average of whole year. The markets remain open nearly for 200 days in a year. A 50 day moving average shows us the trend of nearly last 3 months. which becomes a quarter. Dont consider it as perfect but it is approximate. if the share price is abve 200 day moving average we can consider it for trading. When the 50 day moving average crosses 200 day moving average upwards, it is a time for us to take positions. When the price goes down the 50 day moving average its time to exit.
We can make a change that if the price is taking support on 50 day moving average we can take more positions an we can do it on every support. And we we'll get out when the price goes down than 50 day moving average. This is very basic. I have just made it simple but do everything at your risk. The professional traders add some more techniques to it. Everyone has to study it, and find what will work for you.
Let's see some other techniques
Short - medium term
Strategy 1
By Short - medium term I mean 3 months to 6 months. In this we can use the moving averages of 50 days and 20 days we can also use the same technique as above but just for short term or by changing the moving averages. When price goes above 50 day moving average and the 20 day moving average crosses the 50 day moving average upwards we can take positions and when price goes below 20 day moving average we can sell. if it is taking support we can add more positions to it and sell the entire amount when price goes down below 20 day moving average.
strategy 2
We can also use the the other technique that we can plot only 20 day moving average and when the price goes above 20 day moving average with a big breakout and large volume we can take positions in it and add take more positions as it takes support on 20 day moving average this trick it is very simple but can be very effective specially in the Bull run. as many of us have experienced this you can see candlestick chart of any company specially I would recommend to see Nifty 50 companies and you will find most of the companies took support on 20 day moving average and traders have earned a lot of profit but we need a proper setup and confidence
Swing trade
For the swing trade also so we can use the 20 day moving average technique to trade on that. Swing trade is for a week or less than a week so to move on that swing we must get the idea of how the price can move and it is very difficult to apply it properly, specially in swing trade. but for the mid- short term it is a good techniques to study for a beginner. I am more faithful about the crossover technique than a single moving avreage.
Does the strategy of moving average always work?
Without any this or that. The direct answer to this question is "no". This can't happen because everyone does the mistakes in the market. Never commit the mistake of timing the market. Just follow your strategy and process. Sometimes you may loose money. It is absolutely OK. But you will also earn money by applying the strategy. Just learn from your mistakes. Find out where you went wrong and move forward. Find the strategy which will work for you. Wait for your setup to happen and then take actions.
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The most important thing to remember while trading
Always put a stoploss. The stoploss is very important in any type of trading. We have no control on your profits but we have some control on our losses. Just remember to follow your stoploss religiously. How to put stoploss is a different topic altogether but no doubt it is very important.
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