How To Use Moving Averages To Buy Stocks?
How To Use Moving Averages To Buy Stocks?
A moving average is a technical analysis tool in which the price point of a given asset, such as a share, is divided by the number of price points to deliver a single trend line.
Moving averages are known to be helpful for all traders because they can be easily calculated for any data set like opening and closing prices of a share, trading volume and many other indicators.
When it comes to stock buy and sell decisions, moving averages are an extended version that most traders use.
Traders can have a 20-minute time frame, 5-day moving average, and 50-day moving average to make and move their decisions.
Moving averages are basically known for technical analysis because it helps the traders smoothen the trend of stock price by removing fluctuations in price to make a perfect and uninformed decision about stocks.
The importance of moving average in the stock market is significant for all traders. Several experts use this method in making buying and selling decisions.
In today’s times, several fintech companies are adopting this method to use it in their mobile platform. Most trading platforms that are app-based feature a chart option that displays all the essential information.
There are a plethora of reasons why a trader should use a moving average for buying stocks. One of the primary reasons is that traders don’t have to stress about any fluctuations in the share market in a day or a week.
According to their final pricing, a trader will get the final pricing, giving an average price of a specific stock based on the time frame you select.
A trader can select a 5-day moving average or a 10-day moving average to know the fluctuations of a particular share.
If a trader sees an upward trend in the graph, it means the prices are soaring up, and if the trader sees a downward trend in the chart, it means the price of the stock is going down.
And if the movement is in the sideways direction, it means the stock price is in a range.
Thus in Indian stock market, moving averages are being widely used by several traders because it describes the performance of a particular stock.
They don’t have to stress about checking every minute detail; all they have to do is open the moving average graph and check out the prediction of the stocks.
Doing this will help the traders to buy the best stocks and to make profitable returns on their investment when they need the most.
There are two types of moving averages used in the Indian stock market which are:
- Simple moving average (SMA)
- Exponential moving average (EMA)
Simple moving average (SMA)
The simple moving average is an easy and straightforward method to calculate the moving average. It adds up the five current daily prices and divides them with the number five.
Each repetition creates one new average every day, and every moving average is linked to the next average and creates a singular flowing line of a moving average.
Exponential moving average (EMA)
The exponential moving average is used to make a decision based on the purchase of the stock. These moving averages have a different calculation as they make use of weights against the current prices.
It works on a weighing method that sets higher weights to the most current closing price and so on.
When a trader combines the SMA and EMA and plots both their lines, they realize that EMA is more accurate and acts quickly to price changes. This is due to extra weighting on current price data.
The simple way a trader can use moving averages to buy stocks is to know the price trend of a particular stock in which they are interested.
They can do this by plotting a single moving average on their trading chart. If the price of a particular stock goes above the moving average, it means that the price is in an upward trend.
On the other hand, if the price of a particular stock falls below the moving average, it is an indication that the price is in a downward trend.
Thus, every trader needs to plot multiple moving average charts instead of plotting only one.
Plotting multiple moving graphs will give them a clear signal of whether a stock is in an upward trend or downward, depending on the order of the moving averages.
A trader can combine moving averages with their knowledge on trend lines to decide whether to go long or short on a particular stock.
- What are Moving Averages?
- What is Simple moving average?
- What is exponential moving average?
A moving average is a technical analysis tool in which the price point of a given asset, such as a share, is divided by the number of price points to deliver a single trend line.
The simple moving average is an easy and straightforward method to calculate the moving average. It adds up the five current daily prices and divides them with the number five.
The exponential moving average is used to make a decision based on the purchase of the stock. These moving averages have a different calculation as they make use of weights against the current prices.
Final Thoughts
Moving averages are an easy yet essential way to filter random fluctuations and smooth out the price action. Moving averages are a solid tool if a trader knows how to use them.
However, several traders make heinous mistakes when they use moving averages for trading.
But if a trader learns and knows the strength of each moving average in a suitable time, the results can turn out to be profitable.
By analyzing the moving averages of a specific stock, traders can see the trend or momentum to book their profit. Still, before using this tool, they must know all the risks entailed in using moving averages.