Moving Average Trading: Strategies, Types, Calculations, and Examples

December 15, 2022

what is moving average

This course will make you familiar with the moving average technical indicator while helping you compare other indicators simultaneously. Also, if you wish to go with the moving average trading, you will be able to learn more about each type of moving average and the strategies in depth. In moving average trading, the moving average indicator is simply used to predict the price change and the change in the trend of the financial market. In moving average trading, each moving average indicator has its own pros and cons.

For example, chartists can use moving averages to define the overall trend and then use RSI to define overbought or oversold levels. Do not expect exact support and resistance levels from moving averages, especially longer moving averages. Markets are driven by emotion, which makes them prone to overshoots. Instead of exact levels, moving averages can be used to identify support or resistance zones. Moving averages are typically based on price data, and specifically closing price data. However, this indicator can be applied to other types of price data , volume data, or even other indicators. The example below shows a chart with a 50-day SMA applied to the volume bars, and a 20-day EMA applied to the RSI indicator.

4 – Moving average crossover system

Here is a chart that shows the application of the trading system on Ambuja cement. The black line on the price chart is the 50-day exponential moving average. I have plotted a 50 day SMA and a 50 day EMA on Cipla’s closing prices. Though both SMA and EMA are for a 50 day period, you can notice that the EMA is more reactive to the prices and sticks closer to the price. The average calculated on this scaled set of numbers gives us the Exponential Moving Average . I deliberately skipped the EMA calculation part, simply because most of the technical analysis software lets us drag and drop the EMA on prices.

  • However, the closing prices are used mostly by the traders and investors as it reflects the price at which the market finally settles down.
  • The EMA moves much faster and it changes its direction earlier than the SMA.
  • Simple moving averages are an average of prices over the specified timeframe, while exponential moving averages give more weight to recent prices.
  • If XYZ stock closed at 30, 31, 30, 29, and 30 over the last 5 days, the 5-day simple moving average would be 30 [(30 + 31 + 30 +29 + 30) / 5 ].
  • Essentially the same formula as exponential moving averages, they use different weightings — for which users need to make allowance.

A faster moving average has less lag when compared to a slower moving average . In my trading, I use an SMA because it allows me to stay in trades longer as a swing trader.

Exponential Moving Average

He has 8 years experience in finance, from financial planning what is moving average and wealth management to corporate finance and FP&A.

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