Crores of retail investors in India have a single aim: Making as much profit as possible. However, when you meet and talk to someone active in the stock market , there are always some instances when they lost a considerable amount of money. Like profits, losses in the stock market happen with the same frequency. Price fluctuations, volatility, corrections, bear market, etc., are the main reasons that may force an investor to realize losses. However, it depends on the frequency of losses that an investor is realizing which is important for a successful investor.
If you incur constant losses and are choosing stocks that are not fundamentally strong, there are high chances that you will be unsuccessful. In such a case, the portfolio becomes negative, and the invested amount does not deliver the expected returns.
If you think that your portfolio is always in the red, even when the stock market is climbing new highs, there may be something wrong with your techniques and strategies. This blog details the techniques successful investors use and, among them, the most widely utilized: 30 days moving average.
But before you jump to understand the 30 days moving average, you need to understand moving averages in general.
What are Moving Averages?
There once existed a time when trade was simply restricted to the exchange of goods or services. Even though investors still associate trading with giving and taking of tangible commodities, there have been too many branches that adorn this mighty tree. Shares, futures, and bonds are a few of the many instruments traded in the current market. With increasing complexities, there has been an increase in various value computing and calculating methods.
One such method is calculating Moving Averages. It is a tool that provides a stable observation of the price action of shares. In simpler terms, it is the average of values from the specific number of days. One important detail about Moving Averages is that it relies on the data of activities that have already occurred in the past, thus, giving them the term, Lagging Indicators.
Types of Moving Averages
Here are the types of moving averages that investors use to analyze stocks and mitigate their losses:
- Simple Moving Average: It combines the price points of a given stock over a specified time frame and divides it by the number of price points to give a single trend line. Moving averages can be calculated for any sequential data set, but it is most commonly used in the case of price and volume data based on time series data. You can also extend the moving average analysis to high price, low price, closing price, average price, open price, etc., for a more granular view of the market.
- Exponential Moving Average: The EMA does not focus mainly on the daily stock price of a particular company over the past few days but focuses more on the recent price. These exponential moving averages or EMAs are calculated by taking the closing prices of the defined period. This is considered to be more reflective of the trend that traders are actually looking at and hence is more actionable. The benefit of EMA is that they react faster to changes in price and hence offer a good high-frequency trading technique.
- Weighted Moving Average: This type of moving average assigns a heavier weighting to more recent data points since it assumes that they are more relevant than past data points. In the weighted moving average process, the sum of the weighting should add up to 100% or 1.
- Triangular Moving Average: The triangular moving average is used by investors to get valuable insight into the prices of the assets they wish to analyze. It provides data that is double smoother when compared to weighted and exponential moving averages.
- Time Series Moving Average: The time series moving average aims to provide smooth data points by the use of linear regression techniques. The TSMA plots only the endpoints listed on the lines rather than plotting the regression line into a straight linear system.
What is the 30-days moving average?
A 30-days moving average is an essential part of moving averages and technically defines the movement of stock prices over 30 days. It is a short-term technical indicator which is the average of the closing price of a particular stock over 30 days. This technique is widely used by investors looking to invest for the short term.
For example, to find a 30-days moving average, you can just add the closing price of a stock for the last 30 days and divide the result by 30. The resultant number will be the 30-days moving average.
Importance of 30-days moving average
Here is why a 30-days moving average is beneficial to making better profits in the stock market:
- Market Trend: The moving average takes the investor closest to the current market trend allowing them to predict the trend shortly.
- Easy to calculate: Among various other technical indicators that are tough to comprehend, this moving average is the easiest to calculate. Furthermore, finding the stock price for the last 30 days is also very easy.
- Quick orders: Instead of monitoring a stock daily, investors use the 30-days moving average to place buy/sell orders. After finding the 30-days moving average, they make informed decisions if the stock price is higher than the average price.
- Short-term trading: The 30-days moving average is one of the most widely used for short-term trading. As this average price is the closest to the actual stock price, it helps investors make profits in the short term.
For traders looking to make quick profits in a short period, the calculation of a 30-days moving average can prove to be the most beneficial. However, an investor should not solely rely on the moving average to enter at the bottom and exit at the top. Investors should use the tool in conjunction with other technical tools.
To leverage the 30-days moving average, you will need a Demat and trading account to hold and buy/sell the stocks. IIFL allows you to open a free Demat cum trading account by just following some simple steps. Visit IIFL’s website or the IIFL share market app to open the free Demat cum trading account. Click on the ‘Open Demat account’ option, submit the required details, verify the documents, and IIFL will open both of the accounts for you in less than 24 hours.
