How To Use a Moving Average to Buy Stocks

07 May, 2022

6 min read

153 Views

icon
Understand what moving average is, when it is utilised, and the formula used to calculate it.

Tools to Analyse Stocks

If you’re familiar with the stock markets it’s likely that you’ve heard that investors, traders, and all those keeping tabs on the market frequently employ measures to analyse stock prices. Among these measures, fundamental and technical analyses are worth noting. Moving average (or MA) gains credence when considering technical analysis. Continue reading to understand all that the moving average indicator entails.

Defining Moving Average

Moving average can be defined as a tool used to conduct technical analysis such that price data is smoothened with the creation of a constantly updated average price. The average referred to here is amassed over an outlined period of time which may be as per the trader’s choice. It could be 15 days, 40 minutes or even 30 weeks. Incorporating a moving average into your trading routine can stand to be beneficial especially as you have the option to select the kind of moving average you implement. Strategies relating to moving average are fairly popular and can be tailor-made to suit any time frame which is ideal for both, short-term traders as well as long-term investors.

Understanding the Value of Using Moving Average

By employing a moving average, you can reduce the amount of noise on your price chart. By simply looking at the direction of the moving average it is possible to ascertain the way in which the price is moving. In case it is angled upwards, it indicates that the price is moving up overall whereas if it is angled downwards, it indicates that the price is dipping overall. If the moving average is moving sideways, it indicates that the price is likely to be in a range.

It is also possible for the moving average to act as support or resistance. In case of an uptrend involving a 50-, 100- or 200-day moving average, it may take on the role of support level as the moving average takes on the supportive role of a floor such that the price can bounce off it. If, however, there is a downtrend, the moving average may act like a ceiling (or resistance) as the price may hit this level and then begin to drop again.

It is important to note that it isn’t necessary for the price to always respect the moving average in this fashion. There could be plenty of instances wherein the price may run through it to a certain extent or else stop and reverse before reaching it.

Owing to this very fact, as a rule of thumb you can assume that if the price lies above a moving average, the trend is up. On the flip side, if the price falls below the moving average, the trend is down. That being said, MAs are capable of having different lengths owing to which one MA may indicate a downward trend whereas the other may point toward an upward trend.

Taking a Look at Varied Moving Averages

You can calculate the moving average in a number of ways, some of which have been explored below.

Calculating Simple Moving Average (or SMA) - If you wish to use a 5-day simple moving average, you must add up the five latest daily closing prices and divide the number arrived at by five so that you are able to arrive at a new average for each day. By connecting each average, you are able to create a single line that flows naturally.

Exponential Moving Average Formula (or EMA) – Calculations involved are more complex owing to the fact that greater weight is assigned to the most recent prices. Should you choose to plot a 50-day EMA and 50-day SMA on a single chart, it will become apparent to you that the EMA reacts with greater speed to price changes in comparison to the SMA owing to the additional weight assigned to recent price data. As trading platforms and charting software perform calculations, you don’t need to rack your brain to employ moving averages.

It is important to note that one form of moving average isn’t superior to another. Instead, they each gain relevance in different scenarios. This means that in certain scenarios EMA may suit the stock or financial market whereas in others SMA may be more appropriate. Further, the time frame selected for the moving average is also relevant and will impact how effective it is regardless of the kind of MA opted for.

Deciphering the Length of Moving Averages

10, 20, 50, 100 and 200 serve as the most common moving average lengths and can be added to any chart time frame in accordance with a trader’s time horizon. The term used to refer to the time frame selected for a moving average is called its “look back period”. This time frame can impact how effective the moving average is. In order to understand this better, consider an MA featuring a short time frame which will react far more quickly to price changes in contrast to an MA boasting of a long look-back period. 

Wrapping Up

The value of a moving average lies in the fact that it helps provide simplified price data as it smooths it out and creates a single flowing line making the trend easier to see. If you wish to learn more about moving averages and simply visit the Angel One website.

 

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.

How would you rate this blog?

Comments (0)

Add Comment

Related Blogs

  • icon

    Ashneer Grover Biography -...

    28 Feb, 2022

    5 min read

    READ MORE
  • icon

    Long-Term Investments

    28 Jan, 2022

    7 min read

    READ MORE
  • icon

    Understanding Taxation on...

    26 Oct, 2021

    7 min read

    READ MORE
  • icon

    What is Pre-Market...

    10 Feb, 2022

    6 min read

    READ MORE
  • icon

    Capital Gains Tax

    23 Mar, 2022

    5 min read

    READ MORE
  • icon

    What is Guerrilla Trading?

    01 Nov, 2021

    7 min read

    READ MORE
  • icon

    What Are the Risks of...

    19 May, 2022

    7 min read

    READ MORE
  • icon

    Aman Gupta: Success Story...

    17 May, 2022

    5 min read

    READ MORE
  • icon

    Why Gold Rate is...

    13 May, 2022

    5 min read

    READ MORE
  • icon

    Top 7 Types of Investment...

    11 May, 2022

    8 min read

    READ MORE
  • icon

    Ratan Tata's Youngest...

    15 May, 2022

    4 min read

    READ MORE
  • icon

    Top 6 Types of Trading in...

    05 May, 2022

    7 min read

    READ MORE
  • icon

    Success Story of Vijay Kedia

    21 Oct, 2021

    8 min read

    READ MORE
  • icon

    A Beginners Guide To...

    02 May, 2022

    7 min read

    READ MORE
  • icon

    Basics of Algorithmic...

    21 Feb, 2022

    7 min read

    READ MORE
  • icon

    Shiv Khera | Every Success...

    21 Apr, 2022

    5 min read

    READ MORE
  • icon

    Stock Trading Bot

    03 Nov, 2021

    7 min read

    READ MORE
  • icon

    Understanding Different...

    09 Mar, 2022

    8 min read

    READ MORE
  • icon

    The Future Of...

    16 Feb, 2022

    8 min read

    READ MORE
  • icon

    Lenskart Startup Story:...

    29 Mar, 2022

    6 min read

    READ MORE
  • icon

    India’s top 10 favourite...

    22 Dec, 2021

    8 min read

    READ MORE
  • icon

    LIC IPO Details: Should...

    18 Feb, 2022

    6 min read

    READ MORE
  • icon

    Double Taxation Hangs On...

    01 Dec, 2021

    8 min read

    READ MORE
  • icon

    Deadweight Loss Of Taxation

    31 Jan, 2022

    7 min read

    READ MORE
  • icon

    How to Create Your Own...

    25 Apr, 2022

    8 min read

    READ MORE
  • icon

    Raamdeo Agrawal: How...

    13 Jan, 2022

    10 min read

    READ MORE
  • icon

    ​​Sugar Stocks Down as Sensex Falls

    29 Oct, 2021

    7 min read

    READ MORE
  • icon

    Sundar Pichai: Success...

    31 Mar, 2022

    6 min read

    READ MORE
  • icon

    LIC IPO: Benefits for Policyholders

    18 Feb, 2022

    7 min read

    READ MORE
  • icon

    Nirmala Sitharaman’s Success Story

    26 Mar, 2022

    5 min read

    READ MORE
  • icon

    ​​Dr APJ Abdul Kalam:...

    14 Apr, 2022

    5 min read

    READ MORE
  • icon

    Taxation of Permanent...

    02 Dec, 2021

    7 min read

    READ MORE
  • icon

    Paytm IPO

    08 Nov, 2021

    7 min read

    READ MORE
  • icon

    Exploring Ed-Tech Giant...

    02 Mar, 2022

    8 min read

    READ MORE
  • icon

    How Does Bitcoin Mining Work

    21 Jan, 2022

    7 min read

    READ MORE
  • icon

    Russia vs Ukraine War:...

    10 Mar, 2022

    7 min read

    READ MORE
  • icon

    Crypto Ban in India?

    25 Jan, 2022

    6 min read

    READ MORE
  • icon

    Nykaa Success Story -...

    22 Dec, 2021

    8 min read

    READ MORE
  • icon

    Taxation Rules for Bond Investors

    03 Jan, 2022

    4 min read

    READ MORE
  • icon

    Welfare Loss of Taxation

    28 Oct, 2021

    7 min read

    READ MORE
  • icon

    An Introduction to Trading...

    10 Nov, 2021

    7 min read

    READ MORE
  • icon

    10 Ways to Profit in a Bear Market

    30 Nov, 2021

    8 min read

    READ MORE
  • icon

    Exploring top Retirement...

    08 Oct, 2021

    7 min read

    READ MORE
  • icon

    Cryptocurrency Insurance,...

    08 Nov, 2021

    6 min read

    READ MORE
  • icon

    SEBI revises risk...

    07 Dec, 2021

    8 min read

    READ MORE
  • icon

    Foreign Investment Funds...

    02 Feb, 2022

    6 min read

    READ MORE
  • icon

    Investing in Cryptocurrency

    06 Apr, 2022

    7 min read

    READ MORE
  • icon

    Top 10 Most Inspirational...

    27 Apr, 2022

    7 min read

    READ MORE
  • icon

    ​​Dhirubhai Ambani’s Success Story

    07 Mar, 2022

    7 min read

    READ MORE
  • icon

    The Success Story of Jack...

    22 Oct, 2021

    5 min read

    READ MORE
  • icon

    Futures Options Strategy Guide

    19 Jan, 2022

    8 min read

    READ MORE
  • icon

    Investors Walk Away from...

    27 Oct, 2021

    7 min read

    READ MORE
  • icon

    Blue Chips Fuel Record

    25 Oct, 2021

    6 min read

    READ MORE
  • icon

    Preference Shares:...

    17 Mar, 2022

    6 min read

    READ MORE
  • icon

    What is Cryptocurrency?

    09 Oct, 2021

    7 min read

    READ MORE
  • icon

    10 Day Trading Strategies...

    28 Dec, 2021

    4 min read

    READ MORE
  • icon

    Upcoming IPO in Nov-2021

    08 Nov, 2021

    8 min read

    READ MORE
  • icon

    Invesco drags Zee to NCLT

    06 Dec, 2021

    8 min read

    READ MORE
  • icon

    LIC IPO: Expected Date, Price, DRHP

    18 Feb, 2022

    7 min read

    READ MORE
  • icon

    5 Stocks to Watch Out for...

    05 Jan, 2022

    8 min read

    READ MORE
  • icon

    Environmental Impact of...

    09 Nov, 2021

    7 min read

    READ MORE
  • icon

    Taxation in 2022:...

    11 Apr, 2022

    7 min read

    READ MORE
  • icon

    What Happens to Bitcoin...

    14 Feb, 2022

    6 min read

    READ MORE
  • icon

    What Is Double Taxation?

    11 Jan, 2022

    7 min read

    READ MORE
  • icon

    Top 10 Stocks for 2022

    29 Apr, 2022

    7 min read

    READ MORE
  • icon

    Tax on Cryptocurrency

    04 Apr, 2022

    6 min read

    READ MORE
  • icon

    Top 5 eco-friendly cryptocurrencies

    21 Dec, 2021

    9 min read

    READ MORE
  • icon

    Stocks to Watch: Reliance...

    29 Dec, 2021

    5 min read

    READ MORE
  • icon

    Top 5 IPOs of 2021

    01 Feb, 2022

    6 min read

    READ MORE
  • icon

    IRCTC Stock and Share Split

    03 Dec, 2021

    7 min read

    READ MORE
  • icon

    What are Indirect Taxes?

    15 Mar, 2022

    7 min read

    READ MORE
  • icon

    Should You Invest in...

    10 Oct, 2021

    8 min read

    READ MORE
  • icon

    Is Google a Good Investment?

    11 Nov, 2021

    8 min read

    READ MORE

Translate the power of knowledge into action. Open Free* Demat Account

* T&C Apply

Latest Blog

Ready To Trade? Start with

angleone_itrade_img angleone_itrade_img

Subscribe to #SmartSauda Newsletter

Open an account