The Moving Average Tutorial

Moving Average is one of the most popular and widely used among all technical indicators. Let's begin by defining it, moving or running average is the average of price movements during a certain time period, plotted on the graph. For example, if we want to calculate 20 day moving average we will add closing prices of last 20 days and divide the sum by 20. The term moving is used because only latest 20 days are used for the purpose of calculation. The moving average is essentially a trend following device, it signals whether the prevailing trend will continue or a new trend has started. The two most commonly used moving averages are simple and exponential. Simple on one hand assigns equal weight to unit of time period being used, exponential assigns higher weight to recent price movements. We need not get into the depth how they are calculated let's straightly get into how to use them to generate buy and sell signals:

1) Double Crossover Method:- Under double crossover method two moving averages are inserted in a chart one of shorter duration and the other of longer duration. A buy signal is generated when the shorter crosses the longer from the bottom and a sell signal generated when the shorter average fall below the longer one. Most popularly used combinations are 5 and 20 days average, 10 and 50 days average or 20 or 50 days average.

To insert your moving average in your chart just visit our favourite charting site chartink.com
search for your stock and turn on desired moving average from the above options and click update chart





















check out the sell signal generated by 10-20 days moving average, immediately the after the 10 days simple moving average fell below the 20 day sma the trend reversed and stock started falling



more example of moving average crossover:



The following example shows both buy and sell signal generated using double crossover method on same chart





I prefer using 20 and 50 days sma for this purpose, buy as soon as 20 days sma moves above 50 day sma and sell as soon as it falls below it. You can use both simple or exponential moving average for this purpose.


2) Tripple Crossover Method:- The most popular tripple crossover method is the 4-9-18 method which was first discussed by R.C. Allen in his book "How To Build A Fortune in Commodities". Under this system the 4 day m.a follows the price most closely followed by 9 and 18. A buying signal is generated in a down trend when the 4-day ma moves above 9 & 18, and is confirmed when the 9 moves above the 4. This placed the 4 ma above 9 and 9 ma above 18 in proper alignment. In the same manner a sell signal is generated when the 4 ma moves below 9 ma and is confimed when 9 ma moves below 18 and the ma are in proper algnment as 18 ma at the top, 9 ma below it and 4 ma at the bottom.

Another variation of the 4-9-18 method is 10-20-50 method which can be seen from the following figure




That's all we need to know about moving averages, let's summarize what we have learnt so far

1) Use options given on chartink.com to turn on moving averages in a chart

2) In case of double crossover method, two averages are used one smaller and the other bigger. Buy when the smaller moves above the larger and vice versa

3) Most popular combinations in case of double crossover are 5-10, 10-20, 20-50

4) In case of triple crossover three  averages are used say 5-10-20, a buy signal is generated when the smallest(5) moves above all(20) and is confirmed when the middle one(10) moves above the largest(20). The averages have to be in proper alignment 5 at the top, 10 below it and finally 20 at the bottom.

5) For sell signal in case of tripple crossover the order gets reversed.


Hope I was clear with the stuff, doubts if any from your side can be asked in the comments.


Happy Trading
The Multiplier







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9 comments

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Anonymous
AUTHOR
June 12, 2015 at 11:59 AM delete

Good one bro....another learning...thanks

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Sunil Bhairi
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June 16, 2015 at 1:47 PM delete

Superb article...valuable info tnx

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June 16, 2015 at 6:39 PM delete

keep learning keep earning..............

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August 16, 2015 at 2:04 PM delete

awesome article. I liked very much.. please upload more and more materials to lean about the stock market and also to earn....

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Girijan
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August 31, 2015 at 8:18 PM delete

Thank you for the article. However, I have a question as to which one is most preferred. Double cross-over or Triple cross-over? Still, will you indicate which one is more appropriate for positional trading? I presume that for long term buy, we may use the triple cross-over method??

Further, for a buy, if we can rely MACD Divergence over Moving average, as I have observed that MACD sets the indication beforehand. Your valuable remarks, please.

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September 3, 2015 at 8:32 AM delete

sure broo........................ keep learning keep earning.............. :) :)

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September 3, 2015 at 8:37 AM delete

Girijan ji both crossovers indicate a change in trend for positional trading shorter duration of sma 10-20 or 20-50 may be preferable................... 4-9-18 is equally good and as far as macd is concerned i would suggest use combination of indicators u may use macd along with sma for better results.............. happy investing

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January 30, 2016 at 3:49 AM delete

Abi Bro,
Nice article and i really appreciate your efforts to teach new investors in the market.
God bless you bro.

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