# How to Use Moving Average in Trading

June 09, 2021

**How to Use Moving Average in Trading**

**Moving
Average (MA)** is a calculation
where multiple averages are created using data subsets of a whole data set to
identify and analyse trends. In the stock market, it is used as a technical
indicator to plot future stock price trends. The most common moving averages
are the 15-, 20-, 30-, 50-, 100-, and the 200-day moving average.

There
are many other technical indicators, such as the relative strength index,
stochastic oscillator, and pivot points. This article will focus on the moving
average indicator, how to use the moving average method to trade, and moving
average strategies. It will also cover a related indicator called the moving
average convergence divergence (MACD).

**Types of Moving Average **

To
start off, there are two main types of moving averages, the **simple moving
average (SMA)** and the **exponential moving average (EMA)**.

The
SMA is calculated by taking the closing prices of a security for the relevant
period, adding them, and then dividing the sum by the period number.

The
EMA is more complex than the SMA. In the latter, each price in the MA is given
equal weightage. The EMA uses a more complex calculation as it gives more
weightage to the most recent prices.

**Using Moving Average**

The
moving average is a lagging indicator, i.e., it provides data on past prices.
The longer the moving average time period, the greater the lag. A 200-day MA
(DMA) will lag much more than a 20-DMA since the former is plotted for the past
200 days. The latter will lag much less since it is plotted using the most
recent 20-day data.

The
moving average is a completely customizable indicator. You can opt for a moving
average of any period length. The shorter the MA, the more sensitive it is to
price changes.

Here
are a few pointers on using the moving average:

Traders
use short-period moving averages and longer-period ones as well.

You
have to experiment with multiple time periods of the moving average before
deciding what works best for you.

A
rising moving average indicates a security price trending upwards; a downward
moving average, the opposite.

**Using Moving Average to Spot Trending Direction**

When
a stock is on an uptrend, its moving average will act as the support
(the floor) price.

In
a downtrend, the moving average will form a resistance (ceiling) level, with
the stock price likely to go downward.

**Moving Average Convergence Divergence**

You
can also plot two or more MAs for a stock simultaneously to detect crossover,
i.e., the point at which one MA intersects the other.

This
brings us to the moving average convergence divergence (MACD). The MACD is the
difference between a stock’s two EMAs – the 12-period and 26-period EMAs. The
result is plotted as the MACD line.

Next
comes the MACD signal line – a nine-period EMA of the MACD value. When
plotted over the MACD line, it acts as a trigger to buy or sell. It is a buy
signal when the MACD crosses above the signal line; it is a sell signal when it
crosses below the signal line.

**Crossover Trading Strategies**

**Here
are some key crossovers trading strategies:**

Price crossover:

When
the price of a stock crosses over above or below the MA, it signals a change in
the stock’s price trend.

MA crossover:

Two
plotted MAs are bound to crossover at various points. The point where the
short-term MA crosses above the longer-term MA is a buy signal,
signifying a bullish pattern. When the shorter-term MA
crosses below the longer-term MA, it’s a sell signal, indicating a
bearish pattern.

200-day
moving average strategy: You plot the 200-day price line and its 200-day MA. If
the stock price is above the 200-day MA, it is a buy indicator. If it is below
the MA, it’s a sell.

Source: groww.in

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