Intra-day traders consider lower averages (eg: 9-DMA, 13-DMA, 20-DMA) as this helps traders with swing trades wherein they want to capture profits on the day-to-day basis while mitigating risk.
From a broad perspective, the major moving average tracked is the 200-DMA. Securities trading above or crossing 200-DMA on the monthly chart attract attention from even investors, resulting in a steady up trend that later on builds follow-up buying.
Significance of Moving average (MA)
o As the average is arrived on the basis of past data points using a mathematical formula, it assists in filtering out the ‘noise’ and attempts to provide a smooth and clear view on the securities.
o Moving averages affirm support and resistance that enable one to take a trading view
o The intersection of moving averages helps one acknowledge the shift in sentiment.
o In trending markets, MAs help one understand the corrective support levels
Variants of moving averages
There are two types of moving averages: Simple moving average (SMA) and Exponential moving average (EMA). The SMA gives equal weightage to all the data points; while, EMA applies more weight to the recent data. The EMA facilitates trading when one is attempting to make swing profits, or quick trades, as it reflects change in move rather quickly. Whenever the stock breaks out above the hurdle, the EMA provides a swift signal.
Golden / Death Cross
The crossover of moving averages is commonly recognized as a trading signal. This reflects the change in sentiment which inevitably impacts the price. The 'Golden Cross' is a crossing of small moving average with a larger moving average. eg 50-DMA making a positive crossover with 200-DMA, which indicates a bullish outlook as the shorter moving average is conquering the longer moving average value. Likewise, 'Death cross' gives a negative outlook with the 200-DMA crossing the 50-DMA negatively, suggesting a bearish mood going forward. CLICK HERE TO VIEW CHART