How to identify trends using Moving Average?

One of the most important trading skills you should develop is the ability to identify trends correctly. Knowing whether the market is going up, down or sideways gives you a significant advantage as it enables you to position yourself with the flow rather than against it. This improves your chances of getting a successful trade.

But how can you find trend of a stock or a security? While there are several technical indicators that help you visualize trend, Moving Average is one of the simplest and effective tools to identify the trend of a stock.

In this post you will learn to identify trends using Moving Average. Let's get started.
 

What is a Moving Average (MA)?

Moving Average is a technical indicator that calculates the average price of a stock over a specified number of periods. For example, a 20 day MA calculates the average closing price of last 20 days.

The advantage of a MA is, it creates a smoot

h curve and helps filter out short-term fluctuations. For further basic understanding of Moving Average you can refer to one of my articles- What is a Moving Average and How to use it?

How to use Moving Average to find trend?

To determine trend using Moving Average you need to look at two things-

1. The slope of the moving average- Whether it is sloping upwards, downwards or flat.
2. The position of price with respect to MA- Whether the price is above the MA or below it.

Slope of the MA- The slope of MA is the initial and most important thing to note when you wish to identify trend using MA. An upgoing slope suggests the trend is up and a down-going slope indicates a downtrend. A gentle or flat MA is suggestive of a sideways trend.

Let's understand this with the help of a chart.

The chart above is a daily chart of NIFTY. The blue line is a 50 period Simple Moving average. Notice that on the left-hand side of the chart, the MA is sloping up suggesting the trend is up. On the right-hand side of the chart, the slope goes downward, indicative of a downtrend.

The position of price with respect to MA- While slope of the MA is important in identifying trend, the position of price wrt MA is important in finding the phase of the trend that we are in, that is, whether we are in impulsive phase of a trend or corrective phase of trend. Let's simplify it.

When the MA is sloping upward (an uptrend) and price is above MA, the trend is said to be strong or it is in impulsive phase of trend.Conversely, an up-sloping MA (uptrend) with price below MA suggests the trend is up but presently the stock is in correction phase.

Let's understand this with the help of a chart.

Conversely, when the slope of the MA is downward (Downtrend) and price is below MA, it suggests there is strong downtrend and the stock is in impulsive phase of a trend. A downward sloping MA (Downtrend) with price above MA indicates the stock is in downtrend and presently correction is going on.

Let's see this in a chart.

Comparison of 20, 50 and 200 period Moving Averages for trend identification-

Trend is not only about the direction of price movement, that is, whether the prices are moving up, down or sideways. Another variable attached with trend is time period. If you say "XYZ stock is in uptrend", you are making a vague statement as you are not specifying time period. For how long the XYZ stock is in an uptrend, 1 months, 3 months or more than a year?

Time is an important factor when you talk about trends. Technical analysts talk about three kinds of trend based on time period- Short-term trend, medium-term trend and long-term trend. I have written a post covering this topic in one of my articles- Comprehensive guide on trend in stock market- Short term, medium term and long term trend.

Generally, a 20 period Moving Average helps you visualize the short-term trend while 50 and 200 period moving averages let you see medium-term and long-term trends, respectively.

So, which one to choose? This depends on the kind of trader you are and for how long do you hold your positions. For example, a short-term trader who holds his position from a week to a month should choose a shorter period like 20 period MA and a long-term trader can go for a 200 period MA.

While the numbers 20, 50 and 200 are most commonly used, these numbers should not be regarded as gospel. You can try out different numbers and stick to the one that suits your trading style.

I use all three moving averages (20, 50, 200) for trend analysis as this enables me to get a comprehensive view of trends in a stock. 

Let's understand how I do this with the help of a chart. This would also put all the points together that I discussed in this post and help you demystify trend identification.

The chart above is a daily chart of Bharti Airtel. Three MAs has been plotted in the chart. The green line is 20 MA and yellow and red lines are 50 and 200 period MAs respectively. Let us suppose we have to identify trend at point marked as 'A' in the chart. You would notice that at point A the 20 MA is sloping downwards and price too is below 20MA. This suggests the short term trend is downtrend and it is in impulsive phase of downtrend. The 50 MA is sloping upward suggesting a medium term uptrend but price is below 50 MA, so, it is in corrective phase of uptrend. The 200 MA is also sloping upward indicating a long term uptrend and price above 200 MA suggests presently stock is in impulsive phase of long term uptrend.

See how by using 3 MAs together you get a comprehensive view about the stock trend and that too by just giving a brief look onto the chart.

SMA vs EMA: Which is better for trend identification?

SMA (Simple Moving Average) and EMA (Exponential Moving Average) differ in way they are calculated. While SMA is simple arithmetic mean which gives equal weight to all closing prices, EMA gives greater weightage to recent closing prices. Thus, EMA reacts faster to the price changes.

In general, EMA should be used by short-term traders who require early entry and exits from trade and long-term traders should use SMA as it is smoother.

Why use Moving average to identify trend?

Though there are several technical tools to determine trend of a stock, however, Moving Averages are most widely used indicator for trend identification for two reasons-

• Simplicity and ease of use

• Adaptability across different time frames.

Key Takeaways

✅ Slope of the MA matters most: An upward slope shows an uptrend, downward slope shows a downtrend, and a flat slope signals sideways movement.

✅ Price vs. MA position tells the trend phase: In an uptrend, price above the MA means a strong (impulsive) phase, while price below it means a correction. The reverse holds true in a downtrend.

✅ Use multiple MAs for better clarity: The 20-period MA highlights short-term trends, the 50-period MA shows medium-term direction, and the 200-period MA reveals the long-term picture.

✅ Combine MAs for comprehensive analysis: Looking at 20, 50, and 200 MAs together can help you see whether a stock is bullish short-term, bearish medium-term, but still bullish long-term — all in one glance.

✅ SMA vs EMA choice depends on trading style: Short-term traders prefer EMA for faster signals, while long-term traders use SMA for smoother, slower insights.

✅ Why MAs work: They are simple, easy to apply, and effective across all timeframes, making them one of the most reliable tools to identify market trends.