MOVING AVERAGE

There are three types of indicators in technical analysis. They are advanced indicator. Trend
following indicator and co-incidental indicators. Moving average is one of the most popular trend
following indicators. It is a mathematical device which is used to detect the underlying trend of a
stock. It is mostly based on closing prices as because it is based on the past closing price &
follower of trend it gives late signal. That is why it is called a laggard indicator but a confirmed
signal. Trading with moving average will never help us to take early position, it always allow to
take a late position but of course a confirmed position. Mrs. C. Kase, rightly pointed out that
trading with moving average is like attending a party late where the cocktail is over but the
dinner is left. Moving average are of 3 types, i.e. (i) Exponential Moving average; (ii) Weighted
& (iii) simple moving average. Out of these 3, S.M.A. is the most easy to calculate. To calculate a
10 DMA, we’ve to take last 10 closing prices and add them and then simply divide them by 10 &
the result produced is 10 DMA.

The basic understanding of moving average is that in an uptrend the closing price will be greater
than the M.A and in a downtrend closing price is less than the M.A. Let us note that M.A.
represents the trend for the no. of days taken into consideration; i.e to calculate a 10 DMA, we
have to consider the last 10 closing prices and it will obviously reflect the last 10 days’ trend. We
can never understand a 20 DMA trend of a stock by considering 10 DMA.

In an uptrend closing price > M.A. & both will keep on rising.
In a downtrend closing price < M.A. & both will keep on falling.

With the passage of time as more and more research came into the subject, the system of double
moving average was introduced. In the said system, we have to consider two different time frame
at look into it in conjunction. In this system, the shorter time frame average is known as a short
term M.A. or STMA & the longer one is known as LTMA. The relative positioning of the STMA
& LTMA will give us the true direction of price.

(i) In a perfect uptrend, STMA>LTMA & both will continue to rise.

(ii) In a perfect downtrend, LTMA>STMA & both will keep on falling.
 (iii) If STMA>LTMA but LTMA is falling, it is not a perfect uptrend we have to wait
unless LTMA starts rising for any long position.
(iv) If, LTMA>STMA but LTMA is rising, it is not a perfect downtrend wait until LTMA
starts falling in order to initiate any fresh shorts.
(v) At times, both the average will merge at a point known as kissing point. This is a
very dangerous phenomenon; one should not take any position at this juncture, rather
wait for a valid cross over.
(vi) When STMA ticks up over the LTMA and successfully crosses over the LTMA and
both starts rising (STMA>LTMA) then it is regarded as Golden Crossover.
(vii) When STMA ticks down below the LTMA and successfully crosses below the
LTMA from above and both starts falling (LTMA>STMA) then it is regarded as
Dead Crossover.
M.A. works as very good support/resistance as the case may be. If the price is above M.A. will
work as support & the vice versa.

To understand the primary trend, consider 200 DMA. If closing price is above 200 DMA & both
are rising, the long-term trend is said to be up. To understand the intermediate trend, just sec
whether price is above 100 DMA or not & whether both are rising or not.

To judge short-term trend. Consider 21 DMA. If price > 21 DMA & both are rising, the short-
term trend is said to be up.

In a double ‘X’ over system, we can choose anytime frame according to our choice but it must
vary from one time frame to the other. In a standard worldwide accepted system is 13x30 DMA.

Even 4x9x18 DMA is another accepted system for very short-term practice.