How to Use Exponential moving Averages for Deciding Trend
Technical analysis is being used to predict the future direction and momentum of stock by studying the past stock behaviour.
Exponential Moving Average is one of the effective way for assessing stock. We are going to take look at how to use Exponential Moving Averages to analyse price chart.
There are different types of moving averages; we only need to learn about a few key moving averages & how you can use them successfully in you trading. We will keep our discussion limited to EMAs of 20 and 50.
There are two basic ways to use EMAs in your trading.
1. Using two different periods EMA crosses to generate Buy/Sell Signals.
2. Or a single EMA uses as a Support and Resistance Zone.
Easiest way of trading with the EMAs is using two different period EMA on chart and wait for the shorter period EMA cross above or below the longer Period EMA.
If you find the shorter period EMA crossing above the longer period, from a technical point of view, it indicates Bullish momentum in stock. On the other side if you find the shorter period EMA crossing below the longer period it would indicate Bearish momentum in the stock.
Now we are taking an example of 20 days period EMA and 50days period EMA. In this example you can also observe how EMA 50 acts as support and resistance zone on NIFTY 50 chart.
In above chart I have applied purple colour to EMA 20 and blue colour to EMA 50 on daily chart of NIFTY 50.
As you can see the left side of chart the purple line (EMA 20) moved below the blue line (EMA 50) so price soon started going down it showed Bearish momentum. And also check EMA 50 acted as resistance.
On the right side you can see purple line (EMA 20) crossing above the blue line (EMA 50) it shows Bullish momentum. As well EMA 50 act as support level for 2 times on chart. I have mentioned above things on chart with highlighting the bullish and bearish crossing and support resistance level with arrows.
If you miss the opportunity to purchase in bullish side you can get next chance on11/4/16 at the level of 7617.60, at that level price chart took support of EMA 50.
Experts many times suggest buy on dips in certain stocks. One can use EMA 50 as support line for buy on dips in stock.
It is difficult to check all charts on regular basis for finding such kind of opportunity in market. Solution for this, who wants to grab this kind of opportunity, we can use Query Builder ( stock scanner tool) which is available in Smart Trader technical analysis software. It is simple to make such query for finding this type of EMA crossing in any stock.
Below is query example to find EMA20 & EMA50 bullish and bearish crossover:
Here is Query builder screen along with query and results.
Exponential Moving Average can be very powerful tool in trading if we can get perfect opportunity on perfect time. These EMAs are support and resistance level too.
That’s why you should always keep an eye on where the major EMA lines are in a price chart if you are doing your trading on basis of technical analysis.
- Anand Singh Gaur
- Sunil Kothari