Moving Averages and Trend Signals

CA Manish Singh: 
Hello everyone, and welcome to Chapter 10. In the last chapter, we discussed how the market discounts everything, how it factors in all available information, and how that creates trends. Today, we will learn how to measure those trends using moving averages. Moving averages are one of the simplest and most powerful tools in technical analysis. 

What This Chapter Covers: Understanding Moving Averages 

CA Manish Singh: 
A candlestick always represents a fixed duration. It could be: 

• 1-minute
• 5-minute
• 1-hour
• 1-day 

A moving average simply takes the average of the previous set of candles of that chosen duration. 

For example: 

• If you are using a 1-minute candle, then a 10-period moving average means an average of the previous 10 one-minute candles.
• If you are using a 5-minute candle, then a 10-period moving average means an average of the previous 10 five-minute candles.
• If you are looking at a daily candle, then a 10- or 20-day moving average is calculated using the previous 10 or 20 days. 

These numbers (10, 20, 50, 200) are popularly used because they help identify short-term, medium-term, and long-term trends. 

Simple Moving Average (SMA) 

CA Manish Singh: 
The simplest form is the Simple Moving Average (SMA). 

The calculation is straightforward: 
Sum of the closing prices of the last ‘n’ candles ÷ n. 

If the 10-day SMA is rising, it means the average of the previous 10 days is increasing. 
If the 10-day SMA is falling, it means the average of the previous 10 days is decreasing. 

The SMA smoothens out the noise in price movement and helps you see the broader direction. 

Exponential Moving Average (EMA) 

CA Manish Singh: 
Now let us understand Exponential Moving Averages (EMAs). 

An EMA gives more weight to recent price action. This makes the EMA line react faster compared to the SMA. 

Let me show you with an example: 

• The blue line is the simple moving average.
• The orange line is the exponential moving average. 

You will notice: 

• The EMA stays closer to the actual price movement.
• The EMA bends faster when price changes direction.
• The SMA moves slower because it treats all previous candles equally. 

If we are calculating a 10-period EMA, it considers all trades that took place in the previous 10 candles and gives higher relevance to the more recent ones. 

Most traders prefer EMAs because they offer faster signals. 

Golden Crossover and Death Crossover 

CA Manish Singh: 
Let us now discuss two of the most widely used signals: 

1. Golden Crossover
2. Death Crossover 

These are typically used on the daily timeframe and involve the 50-period EMA and the 200-period EMA. 

• When the 50 EMA crosses above the 200 EMA, it is called a Golden Crossover. 
  This indicates that the primary trend is turning bullish.
• When the 50 EMA crosses below the 200 EMA, it is called a Death Crossover. 
  This suggests that the primary trend is becoming bearish. 

For example: 

• A recent death crossover on Nifty led to a fall of nearly 1,600 points.
• A subsequent golden crossover led to a rally of nearly 1,500 to 1,600 points. 

These signals are used widely by positional traders and long-term investors. 

Intraday EMA Strategy: 20–50 EMA Method 

CA Manish Singh: 
For intraday traders, I recommend using 20 EMA and 50 EMA on the 5-minute timeframe. 

• If price is above the 20 EMA, avoid shorting. The trend is bullish.
• If price is below the 20 EMA, avoid going long. The trend is bearish. 

When both conditions align: 

• Above 20 EMA and above 50 EMA = strong bullish trend
• Below 20 EMA and below 50 EMA = strong bearish trend 

You will notice: 

• Large, clean trending moves usually start when price breaks and stays above/below the 20 EMA.
• When the 20 EMA breaks downward and price stays below it, the trend weakens and may reverse. 

This is one of the most practical and commonly used intraday trading strategies. 

Summary and Takeaways 

• Moving averages measure trend direction and smooth out price noise.
• SMA is simple, slower, and evenly weighted.
• EMA reacts faster and considers recent prices more strongly.
• Golden Crossover (50 above 200) indicates a bullish primary trend.
• Death Crossover (50 below 200) indicates a bearish primary trend.
• The 20–50 EMA method helps intraday traders avoid counter-trend trades.
• Moving averages help traders align their decisions with the underlying trend. 

In the next chapter, we will learn about Pivot Points and how they help identify potential reversal zones. 

Disclaimer: Investments in securities markets are subject to market risks. Read all related documents carefully before investing.