10-day Moving Average (MA) is a popular near term technical indicator. Graphically, you find it as a trend line on the price chart that represents the averages of the closing prices of the last ten trading days. A short term moving average serves many purposes- It indicates how strong a particular price trend is and also doubles up as useful indicators for placing sell signals. While staying close to the original prices, it smoothens out the price data for the trader to get a clear glimpse of where prices are headed by removing the impact of the noise or daily price fluctuations from the data.
There are different types of moving averages-simple, exponential, weighted, among others. For this article, we will understand what a 10-day SMA (Simple Moving average) is.
How to Calculate?
To calculate it, simply add up the closing prices for the last ten sessions and divide the sum by the number of days that is 10.
The SMA or simple moving average for the first day or the first point will be the average of the last ten closing prices.
For the SMA for the next data point, the earliest entry (closing price of day 1) will be removed, and the closing price of the 11th day would be added. This way, the continuity of the moving average trend line is maintained.
The black trend line below shows the 10-day MA of the BSE Sensex
How to Add to Your Chart?
Most price charts offer a button called Indicators. Indicators have MA as an option in their drop-down menu. When you click on it, you will be asked to select the period or the number of days. For the above example, you can choose ten since we are looking to add a moving average of 10 days to our price chart. Then you will be asked to select the type of moving average-simple, exponential, weighted or any other. Here, we have chosen the ‘simple’ option for the above example. On doing this, you will see the trend line appear on the chart laying over the current prices.
The 10-day moving average strategy is a lagging one, that is, by the time averages catch up, a significant price move may have already occurred. Also, the moving averages rely on historical prices to calculate trends. But analyses show that these averages still have reasonably strong sell signals. That is when prices decidedly trade below the 10-day average, it may signal that price consolidation has happened and it is time to sell and exit.
Reaction to Prices
A shorter-term moving average like ten days is reactive to price changes because of its proximity to the closing prices by time. A longer-term MA may appear more smoothened out on a price chart.
When a short term moving average crosses above a longer-term moving average (like say 100-day or 200-day moving average), it is a sign that the stock is bullish and prices are on the rise. When the short term MA crosses below the longer-term MAs, it signals a downtrend.
Despite its reactivity to price changes, a 10-day moving average is a powerful tool to know if prices are moving in an uptrend or a downtrend. So traders can determine the odds of whether the prices will continue to stay bullish or if the buyers’ steam will run out and the prices are likely to go south. Traders say, particularly when there is a trending market such as the morning trading hours when the trending market is active, this average can be a useful price indicator.