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Assume that you want to calculate 10 days' moving average. For this, the first 10 days' closing price is added and divided by 10, and this value is plotted along with the closing price on the tenth day.
On the eleventh day, you have to recalculate the average by dropping the first day and adding the eleventh day. This process is repeated every day (adding the twelfth day's price and dropping the second day's price, and so on).
As is evident from the chart (see Moving averages) moving averages help smoothen the trend by weeding out the noise from day-to-day price movements and give traders a clear view of price trends. This is very easy and is done on the basis of the direction of moving averages. It's an uptrend if the moving average is climbing and the current price is more than this. Similarly, a falling moving average with a lower price means it's a downtrend.
Pairs of moving averages can also be used to identify the trend, which means that it's an uptrend if a short-term moving average is higher than the long-term moving average, and it's a downtrend if the short-term moving averages is lower than the long-term moving average.
The short-, medium- and long-term trends are measured on the basis of appropriate moving averages. For example, a 200-day moving average is considered a long-term indicator (one year). Similarly, 50/100-day moving averages are used for medium-term trading (3/6 months), and 10/20-day moving averages for short-term trading (less than a month).
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