What is Average ?
Guys, you have studied lots of concepts in school. Trigonometry, Newton’s law, Laplace Theorem, lots of math formulas, and theorems.
But now you wonder what we got in life after studying this stuff. What’s the use of them in life? Well, I don’t have a reason for others, but one concept of the Moving Average is certainly going to make you a lot of money.
We all know what is the average of numbers in which we studied in school. You take the sum of numbers and then divide it by the number of numbers. For example Average of 3,5,1,8,3 is 3+5+1+8+3 /5 = 20 /5= 4.
We are going to enlarge this concept a little more now.
What is Moving Average ?
If you calculate the Average of continuously moving data, then it’s the Moving average. As simple as that may be, your daily wages, run of a batsman in every cricket match, the daily income of the Shop, or even daily stock price.
The moving average will help you understand the exact central point of your continuous data. Enough on the Average, let’s see it now as per stock market perspective. The best part is calculation is not your concern here, so relax.😁
Types of Moving Average
There are two types of Moving Average we use in the stock market
1. Simple Moving Average
When I gave you the average example (3+5+1+8+3 /5 = 20 /5= 4) then I gave the same importance to all numbers by dividing each by 5. So it’s the same average concept which I told you so far. For a long-term view, we can use this moving average as even if the data is old or new, it gives the same weightage/importance to each.
2. Exponential Moving Average
Sometimes we need to get a result by giving more focus to recent data in the stock market. That’s why there is an Exponential Moving Average. This moving average is used for the long term but gives a better result in the short term as we gave more importance to recent data.
Using Moving average on chart
Red line = Simple 20 day moving average
Yellow Line = Exponential 20 day moving average
Now we notice two things from this picture
- You can see how moving average acting as support / resistance . You can see box 2 acted as support in the downside but when broken stock went down fast.
- More interesting thing is you can observe in box 1 and 2 when yellow line is below Red line then stock is going down and vice versa.
So means when Exponential Moving average is lower than simple moving average stock goes down and vice versa. So the crossover suggest you trend reversal here.
Strategy for buy /sell , trend reversal using Moving Average concept
To find Out when to buy Super Bullish Stock
See the one sided rally in Dixon on the upside in the above chart, and you don’t know where to buy this stock as it’s making a lifetime high.
Now the strategy is as of now stock is respecting the support of 5 day EMA, so if stock comes near it, then you buy.
The second buy near 20 days EMA, the third buy near 100 days EMA, and the last, the price to buy this stock will be near 200 days EMA if it comes there. If you buy it now, it will be a gamble for sure as the stock is in an overbought zone. Buying prices as per the moving average are valid only and only if you are a long-term investor (min one year).
To find out when to buy Super bearish stock
This is the chart of Godrej properties. Due to the lockdown in the corona, the real estate sector has seen worse, and that’s why the stock has been falling.
Now the best buy for such a super bearish stock will be if and only if stock Consolidate near it’s 200-day EMA. Other moving averages will be a good buy too, but as I said, stock is already super bearish, and you can’t take a chance. So near 858 you see it’s 200 day EMA . Once you get BREAKOUT on the upside, you see how strong it was… It went 1100+ and still rising.
Buy and sell signal using simple and Exponential MA
This strategy we already discussed just now, let’s do it with an example.
When the Exponential Moving average line is above the simple moving average line. It gives a buy signal and vice versa. The logic is recent data is getting strong compared to the overall data which suggests exponential average rising.
In circles 1 and 3, you can see crossover gave a bearish sign and stock went down, and the exact opposite case is in circles 2 and 4 where we got a bullish crossover.
I tried with 20 days moving average, and you can try the same using 5 days for multiple crossovers or 50-100-200 day moving averages for less but stronger signs.
Pairing Moving average with PIVOT POINT and MACD to get BREAKOUT or BREAKDOWN in Nifty or Nifty bank for intraday.
Now till circle 1, you can see Nifty bank is falling but in circle 1, it gave a BREAKOUT on upside closing above the red line of 20 EMA. You can see the upside after that, it’s 28000 to 29500+. So almost 1500 points you get, imagine the profit 😁
Similarly, in circle 2, 15 min candle broke support of Pivot point and also 20 EMA where you got double confirmation. Where you can see after BREAKDOWN Nifty bank went from 29750 to 28700. Almost 1000 point movement we got again.
Now interesting thing about circle 3 is we have 3 confirmation.
Can you analyze now circle 4 and 5 ?? Yes you can.
Summary of What we learned so far.
- Average is nothing but sum total of numbers , divided by number of numbers as we learned in school.
- Moving average is average of continuous data like stock price which help us decided trend.
- Two types of Moving average
Simple where equal weightage to all numbers and exponential where recent data has more importance
- Moving average either help you with trend reversal or Trend confirmation as they act as strong support/resistance
- The moving average will be more effective on-trend if the duration of the chart and the number of moving average is more and vice-versa for less duration/number of Moving average.
- If the Exponential Moving average crosses simple moving average then it’s a bullish Crossover and vice versa for bearish.
- 5,20,50,100 and 200 days EMA is more commonly used to find out the buying price for long term investment in Bullish or bearish stock.
- There are lots of strategies as per moving average but the basic thing remains the same about the crossover of a small and large number of moving average or with the crossover of the exponential and simple moving average.
- Accuracy will increase more if you pair moving average with MACD and PIVOT POINT especially in volatile trade like Banknifty.
- Without moving average Technical Analysis will be incomplete as you need past data to analyze the future trend
- Open a Demat account through us and get such stock investment picks every day explained with such technical indicators.
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Chart courtesy Zerodha KITE.
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