1. Moving Average (MA)
If you study stock charts, you might be familiar with the acronyms MA and EMA. It is a tool used to determine the general trend in stock price movement.
The best definition I found was on InvestorWord.com,
Moving Average: 'A technical analysis term meaning the average price of a security over a specified time period (the most common being 20, 30, 50, 100 and 200 days), used in order to spot pricing trends by flattening out large fluctuations.
Moving average data is used to create charts that show whether a stock's price is trending up or down.'
If you know basic math, you already know how to calculate the 'average'. For instance, if you want to calculate the average closing price of a stock over 3 days, you would use this simple formula:
day1 + day2 + day3
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The average price will, of course, change (or Move) with time.
The next time you see a stock chart with a line labeled ''30MA''it indicates the 30-day moving average.
If you want to buy a stock for short-term, see if the 'MA' line is moving up or down. You can plot the line for 1 week, 15 days, 30 days, 3 months etc. You can also plot other indicators such as MACD, RSI etc.
2. Exponential Moving Average
SMA vs. EMA (Exponential Moving Average)
A simple moving average is nothing but the arithmetic mean. You take the closing prices for X number of days, divide it with X, and viola! You got the MA.
Why do we need EMA?
That's because most traders agree that the most recent price data matters more! So if you are calculating the 30-Day MA, you must give more weight (importance) to recent closing prices.
The simple moving average doesn't allow you to do that, because it treats all data (closing prices) as equal. The EMA or exponential moving average allows you to give more weight to the most recent price data.
The blue and red lines represent two sets of EMAs for you. By default it will plot the 15-day Closing EMA (Red Line) and 50-Day Closing EMA (Blue Line). But you can set user-defined criteria for plotting the EMAs.
As you become more conversant with TA, you can play around with a lot of stuff.
'Volatility' as a Risk Management Tool
Volatility is the movement of a stock price without regard to direction.'-
While trading, remember that the higher the volatility, the higher the risk of trading the stock. If volatility favors you, you can make a lot of money. If the volatility works against you, you can lose a lot too.
Even if you use a stop-loss, you have to allow for the average volatility of a given stock price, while setting your stop-loss. If your stop-loss is too tight, you will simply exit with losses from a lot of (potentially) winning positions!
Daily Volatility
Daily Volatility is often measured by the difference between the day's high and low prices. Thus, if day low for Reliance is 2805 and day high is 2900, then the Volatility is 95 points.
If you want to buy and hold reliance stock for a few days, be willing to lose around Rs95 per share (on average) or don't get into that stock!
3.2
Range is a measure of Volatility. The average true range is the highest of A, B & C below:
A. [Today's High] - [Yesterday's Low]
B. [Today's High] - [Yesterday's Close]
C. [Today's Low] - [Yesterday's Close]
Whichever is highest is the ATR or
