Moving Averages Moving Average is one of the widely used tools in technical analysis. It tells us when the price of a stock goes above and below the average, calculated over a period of time, which in turn gives an indication about when to buy or sell a stock. It is basically an extension of the normal ‘average’ we all know of. Se GrowwThere are 2 types of Moving Averages: « Simple Moving Average + Exponential Moving Average Moving Average (itt 2 GrowwSimple Moving Average (SMA) Assume that we are tracking 5-day Moving Average. Given below is the data of a stock price for 6 days. Closing Price ) Day 1 100.1 Day 2 99.5 Day 3 S983) Day 4 102.7 Day 5 103.0 Day 6 102.5 a y g GrowwThe average recorded for day 5 is the average of closing prices of days 1 to 5 = (100.1+99.5+99.3+102.7+103)/5 = 504.6/5 = 100.92 (which is also its Moving Average) While calculating the Moving Average for day 6, we include the latest data (day 6) and discard the oldest data (day 1). So the Moving Average for day 6 is going to be the average of closing prices of days 2to6 = (99.54+99.3+102.7+103.0+102.5)/5 = 507/5 = 101.4 Similarly, while calculating the Moving Average for day 7 we consider days 3 to 7, for day 8 we consider days 4 to 8 and so on. g GrowwExponential Moving Average (EMA) Unlike in Simple Moving Average, where each day is given equal weight, Exponential Moving Average gives more weight to the latest data point. If we are calculating 5-day EMA, then the highest weight will be given to day 5, the next highest to day 4, then day 3, and so on. g GrowwThe calculation of EMA is a bit complex but you can directly use the Exponential Moving Average tool in the Technical Analysis window. Traders prefer EMA to SMA because it reacts to the price change quicker. How to interpret the data? The time period considered is according to the trader. Usually, a 50-day EMA is considered. ga Growwshe ly seth talp Lang ce If Current market price > 50-day EMA, you can consider buying the stock and staying invested till the sell condition is met. If Current market price < 50-day EMA, you can consider selling the stock. g GrowwAs we can see, the price goes above the EMA line at 540 and crosses back again at 603. So if we analyze the trade, the buy price would be 540, sell price 603 which would give a profit of 63 i.e. 11.67%. gs Groww