There are many types of indicators available in the stock market to know the price and trend of shares, out of which moving average is an easy and beneficial indicator to filter the market fluctuations and smooth the price movement. Today in this article we will learn about this indicator in moving average in Hindi and how you can trade at the right price with it.
What is a moving average?
Moving average is a technical indicator that traders and investors use to perform technical analysis of a stock and predict the direction of the trend. Moving averages sum the previous closing data points of any stock or index and then divide the sum by the number of those data points in a specific time period to arrive at the average.
It is very popular among traders as it can help determine the direction of the current trend.
Moving averages enable you to check support and resistance levels by analyzing the past price movements of a stock or index.
It is a measure of trend change that tracks the past price movements of a stock, and analyzes the history of stock market movements to determine potential future patterns. Moving average is primarily a lagging indicator, which makes it one of the most popular tools of technical analysis.
Calculating moving averages in the stock market requires a certain amount of past data, which can be a large amount depending on the length of the moving average.
For example, calculating a twenty-day moving average would require twenty days of data, while calculating a one-year moving average would require 365 days of data. A commonly used time frame for moving averages is the 200-day period.
moving average type
There are two types of moving averages used in the Indian stock market which are as follows:
- Simple Moving Average (SMA)
- Exponential Moving Average (EMA)
Both moving averages give you information about the price trend of the market, but if you want to know the latest value and trend then EMA is a better option.
1. Simple Moving Average (SMA)
SMA is the simplest moving average that can be obtained by taking a set of recent data points and then dividing the total by the number of time periods.
The Simple Moving Average indicator is used to provide signals for traders to enter or exit a stock.
Simple Moving Average is a lagging indicator as it is based on past price data for a given period which can be calculated for different types of prices such as high, low, open and close.
Traders can use this indicator to determine buy and sell signals for shares and it also helps a lot in identifying support and resistance areas.
For example, a stock market trader wants to calculate a simple moving average for a stock by taking the closing prices of the last five days.
Closing prices for the last five days: Rs 20, Rs 22, Rs 19, Rs 21 and Rs 25.
The simple moving average is calculated as follows:
Simple Moving Average = (Rs. 20 + Rs. 22 + Rs. 19 + Rs. 21 + Rs. 25)/ 5 (Number of Days)
Simple Moving Average = Rs.21.4
How can you now take trading decisions using this?
Now if the price of the stock is moving lower as per its price of last 5 days then it gives a signal of downtrend, on the other hand a price above 21.4 indicates an uptrend.
2. Exponential Moving Average (EMA)
EMA is another type of moving average that gives more weight to the most recent price points, making it more responsive to recent data points.
EMA is more responsive to recent price changes than SMA because it applies equal weight to all price changes in a given period.
When a trader combines the SMA and EMA and plots both indicators, they find that the EMA is more accurate and responds quickly to price changes.
There are three steps involved when calculating the EMA indicator:
First of all, we need to calculate the Simple Moving Average for a specific period.
We then need to calculate the multiplier to derive the exponential moving average.
The final step is to calculate the current EMA by taking the period from the initial EMA to the most recent time period, using the price, multiplier and the EMA price of the previous period. Its formula is as follows:
Current EMA = [Closing Price – EMA (Previous Time Period)] x Multiplier + EMA (Previous Time Period)
Why use moving averages?
Understanding the importance of moving averages in the stock market is important for all traders. Many experts use moving averages in making buying and selling decisions.
Most trading platforms that are app-based and that offer a chart option all have a moving average indicator.
There are many reasons why a trader should use moving averages to buy stocks. One of the major reasons is that traders can easily understand the trade of any stock with the help of moving average.
Apart from traders, investors also use moving averages to understand long-term trends.
A trader can choose 5-day moving average or 10-day moving average to know the ups and downs of any particular stock for intraday trading. It completely depends on you how many days you want to use moving average.
One thing you have to remember here is that if you are doing intraday trading then use shorter day moving average and as you progress in swing trading, positional trading, investing, increase the number of days in the moving average accordingly. Keep increasing the number.
If a trader sees the moving average line moving upward in the graph, it means prices are rising, and if the trader sees the moving average line moving downwards in the chart, it means That the stock price is going down. And if the moving average line is moving approximately equal to the price, it means that the stock price is in a sideways trend.
Thus in the Indian stock market, moving averages are widely used by many traders as it helps us understand the performance of a particular stock.
Using moving averages helps traders buy stocks at the right time, due to which their decision can prove to be profitable.
Why use moving averages?
Understanding the importance of moving averages in the stock market is important for all traders. Many experts use moving averages in making buying and selling decisions.
Most trading platforms that are app-based and that offer a chart option all have a moving average indicator.
There are many reasons why a trader should use moving averages to buy stocks. One of the major reasons is that traders can easily understand the trade of any stock with the help of moving average.
Apart from traders, investors also use moving averages to understand long-term trends.
A trader can choose 5-day moving average or 10-day moving average to know the ups and downs of any particular stock for intraday trading. It completely depends on you how many days you want to use moving average.
One thing you have to remember here is that if you are doing intraday trading then use shorter day moving average and as you progress in swing trading, positional trading, investing, increase the number of days in the moving average accordingly. Keep increasing the number.
If a trader sees the moving average line moving upward in the graph, it means prices are rising, and if the trader sees the moving average line moving downwards in the chart, it means That the stock price is going down. And if the moving average line is moving approximately equal to the price, it means that the stock price is in a sideways trend.
Thus in the Indian stock market, moving averages are widely used by many traders as it helps us understand the performance of a particular stock.
Using moving averages helps traders buy stocks at the right time, due to which their decision can prove to be profitable.
conclusion
Moving average is a very popular indicator, by now you must have understood what moving average is and how it works but still it is an indicator which is not always accurate. Therefore, before using it, do a vector test and based on its result you can use moving average.
By doing moving average analysis of a specific stock, traders can see the trend or movement to book their profits.
Nevertheless, before using this indicator, one should know all the risks involved in using moving averages. Because unless you understand risk properly, no indicator in the world, not just moving averages, can help you make profits.
