Trend Following Indicator: Moving Average:

There are different types of indicators in Technical Analysis. Out of these Trend Following Indicators are very important. All trend-following indicators are lagged indicators. They generate a late signal but it is a confirm signal.

The moving average is one of the trend-following indicators. It is a mathematical device which is used to understand the underlined trend of a share. It is mostly based on the closing price. There are three types of Moving Averages:-

1. Simple Moving Average
2. Exponential Moving Average
3. Weighted Moving Average

Out of these three simple Moving average is most easy to calculate. To calculate a simple moving average we have to decide on a particular number of periods. We have to add all the closing prices for that particular period and divide the total by the said period, and the result produced will be considered as the moving average for that particular period. We must note that the Moving average represents the trend for the number of days taken into consideration. To understand the 50 days trend of a stock we have to consider 50-day Moving Averages. We can not understand the 50 days trend of a share by applying 10 days moving average.

The basic conception of the chapter is that in an up trend closing price of a share will be greater than the moving average and in a downtrend, the closing price will be less than the moving average. With the passage of time as more and more research came into the subject, the system of double Moving Average was introduced. In this system we have two different time frames, one is of a shorter span known as a short-term moving average or present moving average and the other one is of a longer time frame known as a long-term moving average. These two different time frame moving averages are used in conjunction known as the Double Moving Average system.

The system works as follows: –

1. In an up-trend short-term moving average will be greater than the long-term moving average and both will continue to rise.
2. In a down-trend short-term moving average will be less than long-term moving average and both will continue to fall.
3. If short-term moving average is greater than long-term moving average where short-term moving average is rising and long-term moving average is falling of up-trend. One should wait in order to generate a valid buy signal.
4. If short-term moving average is less than long-term moving average where short-term moving average is falling but long-term moving average is rising, is not a valid signal of down trend. One should wait for the long-term moving average to start falling to generate a valid sell signal.
5. At times, the short-term moving average and long-term moving average as kissing point. This is a juncture where decisions are not to be taken rather one must wait for a valid cross over.

To understand the primary trend of a share we can use 200 days moving average. If the primary trend has to be up, closing price of that particular share got to be greater than the 200 days moving average and both would continue to go up or vice versa.