What is Moving Averages and how does it

help in Technical Analysis

The moving average is one of the oldest
tools used by technical analysts. The
price of a stock often fluctuates and can
create a lot of noise for an analyst. The
moving averages helps to eliminate the
noise and gives a smooth data set for an
analyst to take better trade decision.
Simple moving Average (SMA)
The most used simple moving average is the
20day, 50day, 100day and 200day moving
average respectively
To calculate the moving averages, we take the
average of the closing price for those number
of days. For example, a 20day simple moving
average is nothing but the arithmetic mean of
the 20 day closing price of the stock, similarly
for 50day, 100 day and 200 day respectively.
Let us consider and calculate the moving average of last 5 days of Nifty50
Going ahead the next 5 day average for Nifty50 will be taken from the next
trading session i.e 20/02/2023 to 24/02/2023
The moving averages are mainly used to
determine support and resistance by the
analyst. Let us understand this by example,
we will be using 50, 100 and 200 day simple
moving averages for now.
Whenever the price is below the moving average, the moving average acts as a
resistance and whenever the price is above the moving average it will as act as a
support.
Let us understand this in a more simplified chart
The price of the index has taken support and resistance at every moving average and a
break on either side has resulted in a breakdown or breakout.
If you notice, Nifty50 gave a breakout once it crossed 50 day moving average after taking
support at 200 day moving averages. Also going ahead, we can also see that 50 day moving
average (red line) has provided crucial resistance which Nifty has not managed to cross.
SMA crossover: Golden Crossover
A Golden crossover is a technical analysis indicator that occurs when a short-term moving average (50-day
moving average) crosses above a long-term moving average (200-day moving average). This is considered a
bullish signal, suggesting that the stock or market is trending upward. If the 50-day moving average crosses
above the 200-day moving average, it could indicate a potential upward trend in the market. This could
encourage investors to buy stocks and drive-up prices.
SMA crossover: Death Crossover
A Death crossover is a technical analysis indicator that occurs when a short-term moving average (50-day moving average)
crosses below a long-term moving average (200-day moving average). This is considered a bearish signal, suggesting that
the stock or market is trending downward. If the 50-day moving average crosses below the 200-day moving average, it could
indicate a potential downward trend in the market. This could discourage investors from buying stocks and lead to a
decrease in prices.
Trading Tips
Rule 1) Buy (go long) when the current
market price turns greater than the 50
days EMA. Once you go long, you should
stay invested till the necessary sell
condition is satisfied.
Rule 2) Exit the long position (square off)
when the current market price turns lesser
than the 50 days EMA.
Starting from left, the first opportunity to buy originated at 165, highlighted on the
charts as B1@165. Notice, at point B1, the stock price moved to a point higher than
its 50 days EMA. Hence as per the trading system rule, we initiate a fresh long
position.
We stay invested by the trading system till we get an exit
signal, which we eventually got at 187, marked as S1@187.
This trade generated a profit of Rs.22 per share.
The next signal to go long came at B2@178, followed by a signal to
square off at S2@182. This trade was not as impressive as it resulted in
a profit of just Rs.4. However, the last trade, B3@165, and S3@215
were quite impressive, resulting in a profit of Rs.50
 Gain/Los
Sl No Buy Price Sell Price % Return
s
01 165 187 22 13%
02 178 182 04 2.2%
03 165 215 50 30%

From the above table, it is obvious that the first and last trades were profitable, but
the 2nd trade was not so profitable. If you inspect why this happened, it is evident
that the stock was trending during the 1st and the 3rd trade, but during the
2nd trade, the stock moved sideways.