Moving Average (MA)

‘Moving Average’ or ‘Simple Moving Average’, is a line drawn on the chart indicating the average price movement based on the price's open, high, low, and close in a particular time frame. Calculating this is not usually required but is the average price of the last ‘n’ number of days.

For example, let’s say we want to find out the moving average for the closing price of 10 trading periods (weekly) of AXIS Bank ltd. Then we can take any 10-trading period’s price and calculate the average i.e. [(sum of prices)/number of trading periods].

To know how it works, refer to the actual chart of AXIS Bank ltd. given below where we have used a 10-trading period, a weekly chart on its closing price. As you can see the red line running across the chart is the 10-trading period moving average which indicates the directional movement of the price so, traders use this indicator to get in and out of the trade. Whenever the average price breaches the MA or SMA line it is most likely to move in that direction. For example, in the month of February, the price gave a downside breakout and breached the 10-trading period MA at a level of 656 and then it went down to the 326 level by the end of March. Similarly, when the price gave an upside breakout at the start of October from a price level of 465 and went up to the price level of 750.

Exponential Moving Average

It is nothing but an advanced version of SMA, SMA is a lagging indicator whereas EMA is a leading indicator, both indicators do similar kinds of jobs but there are only minute changes, EMA is a bit more accurate means it shows the signal of buy & sell signal or the trend of the market earlier than the SMA. EMA has a greater weight than the SMA and also has significance on the most recent data available in the market. Its calculation is a bit complex which we don’t need to learn as everything is easily available in the trading terminal.

EMA (today) = [ Value (today) * (smoothing)/ (1+ Days)] + EMA (yesterday) * [1- (smoothing/ (1+ days)]