Moving average (MA) is an indicator commonly used in technical analysis. Moving averages are calculated to identify the trend direction of a stock or to determine its support and resistance levels. It is a trend-following or lagging indicator because it is based on past prices. 

 

Simple Moving Average (SMA) 

The SMA is a straightforward technical indicator that calculates the average price of a security over a chosen period (e.g., 20 days, 50 days). It essentially smooths out price fluctuations, making it easier to identify the underlying trend. While simple to calculate and interpret, the SMA can lag price movements, especially during periods of high volatility. 

Exponential Moving Average (EMA) 

The EMA is another type of moving average that puts more emphasis on recent prices. It assigns weights to each price point in the chosen period, with the most recent price receiving the highest weight and weights for older prices decreasing progressively. This weighting approach makes the EMA more responsive to new information and quicker to react to price changes compared to the SMA. 

 

Trend Identification:  How the slope of the MA can indicate the strength of the trend. A steeper slope suggests a stronger trend, offering potentially larger profits. 

Support & Resistance: Increased trading volume around these support and resistance zones can further solidify their significance. 

Confirmation & Timing: Combination with Specific chart patterns, that a trader might use alongside an MA crossover for confirmation. 

 

Determine the Trend: 

Uptrend: An uptrend is identified when the price of a security is consistently trading above a moving average, and the moving average itself has an upward slope. This upward slope of the MA suggests that the overall trend is bullish. Additionally, in an uptrend, the price will often make higher highs and higher lows, with the moving average acting as a level of support and bouncing the price action upwards.  

 

 

Examples 

Fig 1: Here we used 30SMA to identify trend in weekly time frame. 

 

Fig 2: Here, the price finds Support at the 30 SMA on the Weekly time frame 

 

Here, we observe additional movements below the moving averages, designed to trap participants and shake out weak hands. 

"Note: The trend does not always exhibit the expected level of smoothness."  

Fig 3: Here, the price finds Support at the 30 SMA on the Weekly time frame 

Here, we can observe a structure of higher highs and higher lows above the moving averages. 

Note: We need to assess whether the price is extended or starting anew, calculate the base count, and determine the percentage from the moving averages. 

 

Downtrend: A downtrend is identified when the price of a security is consistently trading below a moving average, and the moving average itself has a downward slope. This downward slope suggests that the overall trend is bearish. Additionally, in a downtrend, the price will often make lower lows and lower highs, with the moving average acting as a level of resistance and preventing the price from breaking above. The steeper the downward slope of the MA, the stronger the selling pressure, potentially indicating a faster downtrend.  



Fig: 4 Here, the price finds Resistance at the 30 SMA on the Weekly time frame 

 

Fig: 5 Here, the price finds Resistance at the 30 SMA on the Weekly time frame. 

Here, we can observe a structure of lower lows and lower highs below the moving averages. 

Note: The trend does not always exhibit the expected level of smoothness. 

Note: We can integrate this with other technical analysis to achieve a consensus of perspectives. 

 

Pullbacks: 

Uptrend Pullback: 

A pullback in an uptrend is a temporary decline in price where the price dips towards the moving average but doesn't necessarily break below it. 

 

Fig 6: Here, the price finds support at the 20 EMA on the daily time frame. 

Note: The trend does not always exhibit the expected level of smoothness. 

Note: During the pullback, the price can quickly find support at the moving average. 

 

Fig 7: Here, the price finds support at the 20EMA on the daily time frame. 

 

Fig 8: Here, the price undercuts the 20EMA on the daily time frame. 

Note: The price may undercut the moving averages and subsequently move back above the line, potentially attracting fresh orders or trapping existing positions. 

 

Fig 9: Here, the price finds support at the 20EMA on the daily time frame. 

Note: Observe narrow range trading sessions above and below the moving averages to identify low-risk, high-reward trade opportunities. 

 

Downtrend Pullback: 

 A pullback in a downtrend is a temporary price increase where the price rallies towards the moving average but doesn't necessarily break above it. 

 

Fig 10: Here, the price Rejects at the 20EMA on the daily time frame. 

 

Fig 11: Here, the price cut above the 20EMA on the daily time frame and then rejects. 

 

Choppy Market :

prices move erratically and lack a clear trend, often resulting in unpredictable price swings. 

Fig12: Here, price moves around the moving averages (up down, up down). 

Note: We need to remain cautious as stop-loss triggers can occur frequently in choppy markets. 

Fig13: Here, price moves around the 50EMA (up down, up down). 

 

Use a Suitable Moving Average: 

Short-Term MAs (e.g., 10 EMA or 20 SMA): Better for faster, more frequent pullbacks. 

Long-Term MAs (e.g., 50 SMA or 200 EMA): Better for slower, more significant pullbacks. 

Note: Select any moving average you prefer; there is no single best moving average. It's essential to observe and back test to find what works best for your trading strategy. 

 

Moving Average Crossovers (MACs) 

Moving average crossovers involve the interaction of two or more moving averages. These crossovers are often used to signal potential changes in trend direction: 

Bullish Crossover: 

This crossover indicates a potential shift to an uptrend, suggesting it might be a good time to enter a long position. 

Example: A shorter-term MA (e.g., 10 MA) crossing above a longer-term MA (e.g., 20 MA). Which I use regularly 

 


Fig 14: Here, we can observe shift in trend from bearish to bullish trend. 

Note: Adding volume analysis provides additional information for further insights. 

 


Fig 15: Here, we can observe shift in trend from bearish to bullish trend. 

Note: Personally, I will mark swing lows, swing highs, and key levels to provide additional confirmation. 

 

Bearish Crossover: 

Example: A shorter-term MA crossing below a longer-term MA. 

Bearish crossover suggests a potential shift to a downtrend, indicating it might be a good time to enter a short position. 

 

Fig 16: Here, we can observe shift in trend from bullish to bearish trend.

 


Fig 17: Here we can observe a loop, bullish to bearish trend and bearish to bullish. 

Note: Personally, I will mark swing lows, swing highs, and key levels to provide additional confirmation. 



Moving averages have limitations and disadvantages as well. Relying solely on them for buy or sell signals when the price reaches support or resistance zones, or based on crossovers, may not always be effective. It's essential to consider other aspects such as market volatility, broader economic factors, news events, and the overall trading environment. Incorporating fundamental analysis, sentiment analysis, and risk management strategies can provide a more balanced approach to trading decisions, reducing the risk of relying solely on moving averages. 

So, moving averages can do many different things in trading and investment Journey. They reveal about trends, support, and resistance levels. Combining moving averages with other technical indicators and volume analysis makes decision-making by providing an eagle view of market trends and potential entry/exit points. By integrating multiple small pieces of information, we can make quality decisions and increase the probability of successful trades.