InvestorQ : What are moving averages and how are moving averages useful in taking a call on the markets using technical analysis?
indhumathi Sayani made post

What are moving averages and how are moving averages useful in taking a call on the markets using technical analysis?

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shrinidhi Rajan answered.
2 years ago
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Moving averages are smootheners of volatility. For example if the price of a stock on the first 5 days is 355, 341, 349, 361 and 339 then the simple 5-day moving average will be the mean of these five numbers, which is 349. This trend is continued for a longer period day. For example, you use (A to A4) for day 5 and up you use (A1 to A5) for day 6 and use (A2 to A6) for day 7 and that is how it goes on. When the moving average line is plotted along with the normal price line, you get a smoother and clearer trend line as compared to the raw price line. There are many types of moving averages used in technical analysis, but they all have one intention and that is to remove day-to-day price fluctuations and make chart analysis easier. Moving averages allow us to plot smoother lines that show trends and patterns more clearly.

One of the most popular types of moving averages is the simple moving average (SMA). There are also exponential moving averages (EMA) but let us first focus on SMA. To find the simple moving average, just get the sum of all the prices in a certain period and divide it by the number of prices you added up. The most common periods used in TA are the last 20, 50, 100, or 200 trading days but you can really use any period you want. You can use these moving averages to determine support and resistance levels and to identify trend reversals.

Normally, a long-term moving average, like the 200-day moving average, is often used as a basis for the stock’s support or resistance. It shows the general trend that the stock has been moving in. A short-term moving average, like the 20-day moving average, shows how the stock is performing currently. When compared to the long-term moving average, it shows to how the stock is performing compared to its past performance.

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