Updated on March 16, 2023
Moving averages are trend indicators used in Technical Analysis and are easy to use, simple and quite effective. Moving averages can be used for identifying ‘buy’ and ‘sell’ opportunities in the market.
Generally, when stock prices trade above their average price, it is interpreted that the traders are willing to buy the stock at a price higher than its average price. This means they are expecting the stock price to move up and it is a buying opportunity. Similarly, when the stock prices are trading below their average price, it is taken as a sell signal as traders are willing to sell the stock at a price lesser than its average price. Thus, moving averages help traders in developing a strategy and also to identify entry and exit points.
Features of Moving Averages
Some important features of Moving averages are:
1. Simple moving average (SMA) and Exponential Moving Average (EMA) are the major type of moving averages frequently used.
2. Simple moving average gives equal weightage to all data points in the series whereas the exponential moving average prominently uses the latest data series.
3. When the current market price is greater than the exponential moving average, the outlook is bullish.
4. When the current market price is less than the EMA, the outlook turns bearish.