Moving Average
Technical Analysis
What is Average
• We all know average is the mean value.
• It is obtained by adding all the quantities and
dividing the sum by number of quantities.
• Example-we have to find the average of 10,20
and 30.
• 10+20+30/3=60/3=20
Why the term moving average
• We all know that the prices of the shares
fluctuate continuously.
• If we want to find the average price of the
shares for particular days, we will have to add
up the closing prices of the share for that
period and divide it by number of days for
which we are finding out.
Why the term moving average
• Suppose we want to find the 10 Day moving
average(DMA) of a stock.
• We will have to add up the price of the stock
for last 10 days till todays market closing price.
• But tomorrow the stock will close at a
different price and then for calculating 10DMA
we will have to add the closing price of
tomorrow and omit the first one.
Why the term moving average
• So as is evident the average will move with
respect to the last day’s closing price.
• If the last day’s closing is more than the first
day’s that we are omitting ,then the moving
average will have an upward trend.
• And vice versa. So the average is not stagnant.
So the term moving average.
Standard moving Averages
• As average can be of any number of days a
standardization was required.
• We generally use(in India):
• 13DMA
• 30DMA
• 200DMA
• Day Moving average(DMA) and Simple moving
average(SMA) are same things.
Price and 13 DMA Graph
• Lets us now see how does a graph of price and
13 DMA looks like in an upward trend.
Price and 13 DMA Graph
• The DMA will go down if the recent closing is
less than the last price that is to be omitted as
shown below:
The relation between 13 DMA and
price
• The price cannot move too much high from
13DMA.If price has moved high from 13 DMA
then it will come back to 13 DMA and it
should not be purchased but can be shorted.
• If the price is close to 13 DMA then the stock
can be purchased as the price might increase
from there.
How the graph of 13 DMA vs Price
looks like
Some Buy/Sell cases
• The movement of 30 DMA will be less rapid
than 13DMA as it average more number of
days.
• Let us now think of a case where the 13 DMA
and 30 DMA are both in upward direction.
Some Buy/Sell cases
• 13 DMA is crossing over 30 DMA.It gives a buy
signal at that crossing. It should not be bought
straight but rather should be watched out for
buying opportunity.
Some Buy/Sell cases
• Similarly the 13 DMA takes and faster turn and
crosses over 30DMA again as shown above.
• The crossover gives a sell signal.Then we
should look for selling opportunities.
Some Buy/Sell cases
• Now consider a case where the price of a
stock moves up very rapidly above 13
DMA.And the 30 DMA has not moved much.
• The stock falls rapidly at a point where the 13
DMA takes a sharp bent and should be
shorted there.
Some Buy/Sell cases
•Here the 30 DMA is in uptrend.But the stock price is forming
a range and is not moving up.The 13 DMA is curved and is
also not moving much.13 DMA is forming a curve and going
lower.
Some Buy/Sell cases
•Then all of a sudden the 13 DMA moves up.That is the point where we want to
take long position.
•It is generally seen between 12 th to 16 th day of the month where rapid rise
will be seen.
•Valid break out should be seen before the upmove.
•The stock might move 20-30% of the underlying value.
Some Buy/Sell cases
•The 13 DMA is in upward trend.
•The price moves in parallel direction for a few sessions.
•It creates a resistance at a upper level.
•We have to wait for a valid breakout.
•Stock may rally 30% following the breakout. Committed buyer
will be there as they have shorted and short covering will
propel the rally.
Some Buy/Sell cases
•If a stock is above 200 DMA then it is a good stock.
•We can take long position when price comes at lower level.
•We can take short position when price goes to upper level.
•200 DMA acts as LOC.
Some Buy/Sell cases
•If the stock is below 200 DMA then we should take long position
when it is very down.
•When it is close to 200 DMA it should be shorted.
•200 DMA acts a LOC(Line of contro)
Some Buy/Sell cases
• Stock falling toward 200 DMA for the first
time:
•If the stock breaks 200 DMA then the closing will be above 200
DMA that day as 200DMA acts as strong support.
Some Buy/Sell cases
• After breaking 200DMA the stock will trade in
particular range for 45 mins. to 1 hr.
• Then there will be valid breakout.
• Buy the stock at this point as the closing will
be above 200 DMA.
• Example:
Here the price is considered to
range between 475 to 480 for 45
mins. To 1hr.Buy at breakout at
480 level for a target of 200 DMA
level with stop loss at 475.
Some Buy/Sell cases
• 2ND time going towards 200 DMA-After going
above 200 DMA the stock may again come
towards 200 DMA.This time the stock has
50:50 chance of going up or breaking
200DMA.This time we need not take any
position.
Some Buy/Sell cases
• 3RD time going towards 200 DMA-If the stock
falls for the 3rd time toward 200 DMA then
there are two possibilities:
• 1.If the stock closes above 200 DMA then it
will rise up for long term i.e. 6 months to 1
yr.So take long position in that case.
• 2.If the stock closes below 200 DMA then it
will fall for long term i.e. 6 months to 1 yr.So
take short position in that case.
Some Buy/Sell cases
• Conclusion:
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