Moving Averages

MOVING AVERAGES
  Moving Averages are used widely by traders on their price
action charts because they can track and identify trends by
smoothing the markets fluctuations.
 A moving average is a technical indicator that helps you smooth
out price action and it can also identify the ongoing trend in the
market.
 They can also be used to provide dynamic support and
What is resistance levels as the markets moves higher or lower.
Moving Average?  A moving average is simply showing the average price over a
certain period of time.
 As the price changes, its moving average either increases or
decreases.
 The common usage of moving averages is to identify the trends
direction.
 There are several types of moving averages:

• Simple moving average (SMA) – SMA

• Exponential moving average (EMA)

Types of Moving • Weighted moving averages (WMA)

Averages • Smoothed moving averages (SMA)

• There are other types of moving averages like the least

squares moving averages, hull moving average, and Arnaud
Legoux moving average
  The use of the type of Moving Average depends on ones’ trading
and investing style and preferences.

Which is  The simple moving average considerably have a lag, but the
exponential moving average may have quicker breaks.
better?  Some traders prefer to use exponential moving averages for
shorter time periods to capture changes quicker; other
investors prefer simple moving averages over long time periods
to identify long-term trend changes.
 • As the name implies, it is the simplest form of moving average.
 It is very easy to understand and is calculated by adding prices
over a given number of periods, then dividing the sum by the
number of periods.
 For example; a 5-day SMA would add together the closing prices
for the last 5 days and then divide the total number by 5; a
simple arithmetic mean.
Simple Moving  Each time a new period occurs, the moving average moves
Average (SMA) forward dropping its first data point and adding the newest
one.
 Here is another example of a 6-day SMA:
 Last Closing Prices for Apple 43.41, 43.52, 43.21, 43.77, 43.58,
43.63 = 261.12
 To calculate SMA, divide the total of closing prices by the
number of periods 6-day SMA= 261.12/6 = 43.52
  Exponential Moving Average is the 2nd most widely used technical
indicator.
 It gives more weight to recent prices and are calculated by applying
a percentage of today’s closing price to the recent(yesterday)
moving average.
 The difference between the SMA and EMA is that SMAs look at all
data equally while EMAs will factor recent market moves higher in
weight.
Exponential
 EMAs also react faster to recent price changes than SMAs. An EMA
Moving has to start somewhere, so an SMA is used as the previous periods
Average (EMA) EMA in its first calculation.
 After that, calculate the weighting multiplier.
 Lastly, calculate the EMA for each day between the initial EMA value
and today. In order to reduce the lag in simple moving averages,
technicians often use exponential moving averages (also called
exponentially weighted moving averages).
 EMA's reduce the lag by applying more weight to recent prices
relative to older prices. The weighting applied to the most recent
price depends on the specified period of the moving average.
 The two most important uses of Moving Averages are:

Trend identification / Support and Resistance level

Confirmation identification/confirmation

How to Use  The technique for trend

identification is based on the
the Moving location of the shorter moving
average relative to the longer
Average in moving average.
Your Trading?  If the shorter moving average is
above the longer moving
average, the trend is considered
up.
 Another use of moving averages
is to identify support and
resistance levels.
 As with trend identification,
support and resistance level
identification through moving
averages works best in trending
markets.

 If the shorter moving average is

below the longer moving
average, the trend is considered
down.
  As the time frame of the moving average increases, the importance it
increases.

Intraday:
 One should use the 5 min & 15 min TF in case of Intraday trading
Time Frame
Positional / Swing:
 One should use the one hour, daily, weekly TF in case of Positional / Swing
trading

The Weekly & Monthly TF Moving Average is considered to be the most reliable
 Use of Color Codes

20 SMA
Color Codes of
Moving Average
50 SMA

200 SMA
 20 SMA:
 20 SMA is considered as a short-term support and resistance in
market.
 If candles are above 20 SMA the trend is bullish for short term.
 If candles are below 20 SMA, the trend is bearish for short term.
50 SMA:
Use of 20, 50 &  50 SMA considered to be a stronger support & resistance
200 SMA  If candles are already below 20 SMA, then 50 SMA acts as strong
support and resistance.
200 SMA:
 The 200 SMA is the strongest one and the king of all moving
averages.
 If the candles are above 200 SMA the overall trend is bullish.
 If the candles are below 200 SMA the overall trend is bearish.
Always remember the trend is your friend and it
is best to trade in the direction of the trend.
Moving averages will help ensure that a trader is
in line with the current trend.
 Bullish Trend:
 We can identify the bullish trend by using Rising Railway Track Pattern
 Railway Track Pattern:
 Just as the two railway tracks are lined up parallelly; when the 20 & 50 SMA are
progressing parallelly, it is called Rising Railway Track Pattern (RTP)
 Rule: IN RTP, the 20 SMA should always be above the 50 SMA

How to  Both 20 & 50 will serve a strong support, when both are on a rising path
 Bullishness is when there is higher highs and higher lows
identify  ENTRY:

Bullish Trend
 At or near 20 SMA:
 SL:

of the market?  Below 20 SMA:

 Candles should be above 20 SMA and in case 20 SMA is broken then 50 SMA should
act as a support

 EACH AND EVERY TIME THE CANDLES SHOULD BE MAKING HIGHER HIGH AND NEW DAY HIGH
 BUY ONLY WHEN DAY HIGH IS BROKEN
 Bearish Trend:
 We can identify the bearish trend by using Falling Railway Track Pattern
 Railway Track Pattern:
 Just as the two railway tracks are lined up parallelly; when the 20 & 50 SMA are declining
parallelly, it is called Rising Railway Track Pattern (RTP)
 Rule: IN RTP, the 20 SMA should always be below the 50 SMA
How to  Both 20 & 50 will serve a strong resistance, when both are on a falling path

identify  Bearishness is when there is Lower highs and Lower lows

 ENTRY:
Bearish trend  At or near 20 SMA:

of the market?  SL:

 Above 20 SMA:
 Candles should be below 20 SMA and in case 20 SMA is broken then 50 SMA should act
as a resistance.

 EACH AND EVERY TIME THE CANDLES SHOULD BE MAKING LOWER HIGHS AND NEW DAY LOW
 BUY ONLY WHEN NEW DAY LOW IS BROKEN
 How to  20 – 50 flat and Zig Zag:

identify  When there is a flat and Zig Zag 20 & 50; then it is considered that
the trend is Sideways for that particular day
Sideways  In that case, “Avoid trading”
trend of the  Why?
market?  Many false signals will be generated if 20 – 50 are flat or Zig Zag
Examples
 Examples

TREND
Examples IDENTIFICATION

Bullish Trend Bearish Trend Sideways

(Rising RTP) (Falling RTP) Trend
 Examples

Support &
Examples Resistance

20 50 200
MA MA MA