Moving Average

A moving average (MA) is a technical indicator that smooths price data by calculating the average price over a specific number of periods. It helps identify trend direction and potential support/resistance levels.

Types of Moving Averages:

1. Simple Moving Average (SMA):

• Equal weight to all periods
• Formula: Sum of prices / Number of periods
• Example: 50-day SMA = Sum of last 50 closes / 50

2. Exponential Moving Average (EMA):

• More weight to recent prices
• Reacts faster to price changes
• Popular for short-term trading

3. Weighted Moving Average (WMA):

• Linear weighting (most recent = highest weight)
• Middle ground between SMA and EMA

Common Periods:

• Short-term: 10, 20 periods (fast)
• Medium-term: 50 periods (intermediate trend)
• Long-term: 100, 200 periods (major trend)

Trading Applications:

• Trend Identification: Price above MA = uptrend, below = downtrend
• Support/Resistance: MAs often act as dynamic S/R
• Crossovers: Golden Cross (50 crosses above 200) = bullish
• Death Cross: 50 crosses below 200 = bearish

Limitations:

• Lagging indicator
• Works better in trending markets
• Can give late signals