1) What is a moving average?
Moving average (MA) is a simple tool that smooths out price data by creating a constantly updated average price. The average is taken over a specific period of time like 10, 20, or 50 days, or any time period as suitable. The indicator is known as a ‘moving’ average, since its value keeps changing as the data keeps changing over time. I have used a band of 20 DMA.
Here’s an example. Say the closing prices of ITC for the last 5 trading days are:
Day 1: Rs . 215
Day 2: Rs . 220
Day 3: Rs . 222
Day 4: Rs . 226
Day 5: Rs . 239
In this case, the moving average of ITC for a 5-day period is calculated like this.
= (Day 1 price + Day 2 price + Day 3 price + Day 4 price + Day 5 price ) ÷ 5 days
= ( Rs . 215 + Rs . 220 + Rs . 222 + Rs . 226 + Rs . 239) ÷ 5 days
= Rs . 224.
When used appropriately, they provide easy insight into a trend’s direction, its magnitude, . Works magically, for those who depend on strategies to generate entry points. However, for those who prefer to trade price reversals, using moving average crossover strategies is perfectly viable as well.
2) How to buy stocks using moving average? (I use a band of 20 DMA as my strategy)
a) By identifying as shown in the chart: A moving average can also act as support or resistance. In an uptrend, an average may act as a , as shown in the chart. This is because the average acts like a floor (support), so the price bounces up off of it. In a downtrend, a moving average may act as resistance; like a ceiling, the price hits the level and then starts to drop again.
b) By identifying the trend as shown in the chart: Look at the direction of the moving average to get an idea of which way the price is moving. If it is angled up, the price is moving up, angled down, and the price is moving down, if moving sideways, and the trend is likely in a range.
Disclaimer I'm not an expert, i'm still learning. Sharing knowledge will enrich me with more knowledge. This strategy works well for me it may or may not work for you. I tried to explain in a layman's point of view. I reserve the right to be wrong.