Moving average (MA) – Stock market Indicators

  • The MA – or ‘simple moving average’ (SMA) – is an indicator used to identify the direction of a current price trend, without the interference of shorter-term price spikes.
  • The MA indicator combines price points of a financial instrument over a specified time frame and divides it by the number of data points to present a single trend line.
  • The data used depends on the length of the MA. For example, a 200-day MA requires 200 days of data.
  • By using the MA indicator, you can study levels of support and resistance and see previous price action (the history of the market). This means you can also determine possible future patterns.
  • Moving average is also work as a support for a stock if a stock is trading at higher than the moving average in uptrend it means when stock will consolidate or correct its price then moving average will work as a support for that particular stock.

For example:

  • In above picture you can see moving average is in upside direction it means stock is in uptrend, and there is 2 moving average is applied on above stock, 20EMA and 50 EMA.
  • As you can see when price is coming down then at some point 20EMA is working as support for stock. If stock is breaking 20EMA and further coming downward the 50 EMA is working as dynamic support for that stock.
  • If it breaks 50 EMA then 100 EMA will work as dynamic support for that stocks and 200 EMA and so on.

Similarly if stock is in downtrend then these 20EMA, 50EMA, 100EMA and 200EMA will work as resistance for that stock. See the picture below:

In the above picture you can easily see, when stock is in downtrend i.e. stock is trading below the moving average and moving average is also moving in downward direction, at some point you can easily see the if stock price is upside then it’s coming down after touching the EMA or SMA.

In simple word, you can easily find trend and support and resistance by using SMA(Simple moving average) and EMA(Exponential moving average).

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