What is a Moving Average?

A moving average is a stock technical indicator that is calculated to predict individual stock and indices price trend by creating a series of averages from closing price of stocks for a given time period. The most and widely used moving averages in stock market are

1. Simple Moving Average (SMA)
2. Exponential Moving Average (EMA)

Moving Average Strategy

There are many moving average applications / strategies, but most common strategies are

1. Plain Vanilla Moving Average Strategy
2. Crossover Moving Average Strategy

(1) Plain Vanilla Moving Average Strategy

When the stock price trades above its average price, it means the traders are willing to buy the stock at a price higher than its average price. This means the traders are optimistic about the stock price going higher. Therefore one should look at buying opportunities.

Likewise, when the stock price trades below its average price, it means the traders are willing to sell the stock at a price lesser than its average price. This means the traders are pessimistic about the stock price movement. Therefore one should look at selling opportunities

Rule for buy (go long) :

- Buy (Go Long), when the current market price turns greater than the 50 days MA. Once you go long, you should stay invested till the necessary sell condition is satisfied.
- Exit the long position (square off) when the current market price turns lesser than the 50 days MA.

Rule for Sell (go short) :

- Sell (Go Short), when the current market price turns lesser than the 50 days MA. Once you go short, you should stay invested till the necessary buy condition is satisfied.
- Exit the short position (square off) when the current market price turns greater than the 50 days MA.

NOTE - Go with 05, 09, 10, 15, 20, 21, 30, 40, 44, 50, 89, 100, 120,OR 240 days MA that works for you.

- This strategy does NOT work good in the sideways market -

(2) Crossover Moving Average Strategy

In this strategy tow diffrent time period MA is taken into consideration. Instead of the usual single moving average in a MA crossover system, the trader combines two moving averages. This is usually referred to as ‘smoothing’.

A typical example of this would be to combine a 50 day EMA, with a 100 day EMA. The shorter moving average (50 days in this case) is also referred to as the faster-moving average. The longer moving average (100 days moving average) is referred to as the slower moving average.

There are several types of moving average cross traders use in trading. Golden Cross occurs when 50 days simple moving average crosses 200 days simple moving average from below. Death Cross is an opposite situation, when 50 days simple moving average crosses 200 days simple moving average from above.

Rule for buy (go long) :

- Buy (Go Long), when the short term moving average crosess long term moving average from below and turns greater than the long term moving average. Stay in the trade as long as this condition is satisfied.
- Exit the long position (square off) when the short term moving average turns lesser than the longer-term moving average.

Rule for Sell (go short) :

- Sell (Go Short), when the short term moving averages crosess long term moving average from above and turns lesser than the long term moving average. Stay in the trade as long as this condition is satisfied.
- Exit the short position (square off) when the short term moving average turns greater than the longer-term moving average.

NOTE - Go with 05 and 10, 10 and 20, 09 and 21, 20 and 40, 30 and 60, 44 and 89, 50 and 100, 50 and 200, 100 and 200, 120 and 240 days MA combination that works for you.