A Moving Average (MA), as the name suggests, is a moving average of the Closing Prices. Moving average is a lagging indicator. The Buy/Sell signals they generate generally lag the price action, meaning that a change in trend in price shows up in the indicator a little later.
If the price is above a moving average and slope of moving average pointing towards up then trend is up. – Uptrend or Bullish
If the price is below a moving average and slope of moving average pointing down then trend is down. – Downtrend or Bearish
There is no perfect time frame or rule while choosing MA. The shorter the time frame then less reliable MA because of frequent fluctuation while longer time frame will be slow but more reliable. Shorter time frame MA gives more false signal than longer period MA.
There are four different types of Moving Average
- Simple Moving Average (SMA) – Moving Average on closing price
- Exponential Moving Average (EMA) – Moving Average on most recent price.
- Linear Weighted Moving Average (LWMA)
- Smoothed Moving Average
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Moving Averages can be used as Support and Resistance to know the enter and exit point. Two different period moving averages can be used to know the potential trend…
Potential Down Trend – When shorter time frame moving average crosses higher time frame moving average from up to down trend will be down.
Potential Up Trend – When shorter time frame moving average crosses higher time frame moving average from down to up trend will be up.
You may use multiple moving averages to know the potential trend of market or any stock. When shorter time frame moving average crosses higher time frame moving average from up to down and moving average pointing downside that means trend is bearish. When shorter time frame moving average crosses higher time frame moving average from down to up and moving average pointing towards upside that means trend is bullish.