What is Moving Average and how to use it?
Moving average(MA) is one of the most valuable indicators most traders or investors use in their trading system. It helps traders to stay in a trend for a long time.
It works by taking the closing prices of the last n bars(where n can be any number like 1, 2, 3..), adding them together, and dividing by n to get the average price over that period.
The value is plotted on the price chart and forms a line.
Here is what a moving average looks like on a real chart.
Types of Moving Average:
There are basically two types of MAs.
i) Simple Moving Average(SMA) &
ii) Exponential Moving Average(EMA)
Both these MAs are useful in a trendy market. They act as dynamic support and resistance.
Both help to stay in a trend till the end.
But the main difference between the two is Exponential Moving Average is more sensitive to price than SMA.
That means EMA reacts more quickly to the price than SMA.
Moving Average Method Advantage & Disadvantage:
To be profitable in trading we should run a trade until the trend end. And to stay till the end of a trend MA is one of the best indicators.
But in a choppy or sideways market, it is very risky to use MA as price moves up and down frequently.
Entry and Exit in a trade using Moving Average:
In a trending market, you can use MA to get entry and exit signals in a trade.
Simply, when the price crosses above the MA, you may enter a trade(buy a stock), and when the price crosses below MA you may exit(Sell) from the trade.
But always remember MA works best in a trending market.
MA is a very useful indicator in a trending market. But you should not trade only using MA.
You should confirm any buy or sell signal using other indicators like RSI along with MA.
And always avoid using MA in a sideways market. Otherwise, you may face several losses.