In the stock market often investors use the moving average indicators to see average stock prices of some days.
Let’s have an example: the stock market is like a business, so the end of the week or end of the month businessman always averages their earned money.
businessman earning isn’t fixed every day. Business earning will fluctuates day by day.
If businessmen earn first day $1 and second day $2 and 3rd day $3. so three days average earning will be $(1+2+3)/3=$2.
Similarly, the everyday stock price isn’t the same. That’s why you can calculate some day’s average price of the stock.
Why we use moving average?
Businessman calculates 1-week average earning. if daily earning increasing than average earning will also increase. This means business going very well. Or if earning decrease so the business is on the downside.
The same thing applied to here. moving average price is proportional to share prices. It will go upward or downward depending on the average day’s share prices.
What moving average tell you?
if share price crossover 1-week moving average price that means the share price is strong in this week. also, you can use a 1-week average price as a support zone for the short term entry and exit.
Generally, investors check is an average as a 5days(week),10 days(2 weeks),15 days(3weeks), 21days( 4weeks),50 days,100 days, and the last 200days. Here 1 candle = 1 day of the chart.
You can set the chart candle duration 1 day for calculating as a multiple days average.
This is not mandatory to use these days for your calculation. As it is a technical analysis so the way of doing analysis can be different from each other.
But the Secret is most people use the moving average as an entry-exit point. also 200 days average is used as a strong support or resistance point.
Following this indicator helps you when stock price falling too much at that time you can use as a support zone. if the price break support zone and farther fall continue then investors try to exit from the stock to save invested money. And investors wait to break indicators price and try to enter to stock.
Example: if 200 days calculated moving average price is $110, and the current stock price is $105. in this scenario investors try to wait to crossover $110 price ( 200 days moving average). after crossing $100. investors try to enter in the stock. similarly, if the stock price falls down and breaks $110 then try to exit from the stock.
Usually, this is a technical indicator it helps you to find support and resistance zone. This indicator will not help you to predict what will be the future price. everyone trying to find out support and resistance zone.
This indicator gives weightage to the stock price. if stock trade above 200days average price this gives you the reliability to the stock prices. This indicator will not predict future prices.
Some people have a question that which is best (SMA or EMA)?
SMA gives weightage to every day’s price equally.EMA gives more weightage to the latest days’ stock price that’s why EMA is more closer to the current price as compared to SMA. Investors generally use the EMA indicator as it closer to stock price.
But some investors use SMA as a strong support or resistance zone because EMA is closer to the current price. So EMA’s support and resistance is weaker than EMA. sometime EMA’s Signal is false.
This is all about technical analysis everyone tries to find out support and resistance zone. This indicator will not assure you about the future stock price.
Moving average tells you that market on the bull side or bears side. also useful for finding support or resistance price zone.
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