11. Moving averages
Prices jump around every day. A moving average smooths out that noise so you can see the real direction.
11.1 How it is calculated
A 20-day simple moving average (SMA) is the average of the last 20 closing prices. Tomorrow, the oldest day drops out and the newest day is added – so the average "moves" along with the chart.
| Day | Close |
|---|---|
| 1 | ₹100 |
| 2 | ₹102 |
| 3 | ₹101 |
| 4 | ₹105 |
| 5 | ₹107 |
5-day SMA = (100 + 102 + 101 + 105 + 107) ÷ 5 = ₹103.
An exponential moving average (EMA) does the same, but gives more weight to recent prices. So it reacts faster to new moves. Faster is not always better – it also gives more false signals.
One month the bill is ₹3,200 because guests came. Another month it is ₹1,900. If you want to know your real usage, you look at the average of the last few months. That average changes slowly and shows the true trend.
A moving average is the same idea for prices.
11.2 Play with it
11.3 Four ways traders use moving averages
1. Trend direction. Price above a rising 50-day average = uptrend bias. Price below a falling 50-day average = downtrend bias.
2. Dynamic support and resistance. In strong uptrends, price often pulls back to the 20-day or 50-day average and bounces. The average acts like a moving floor.
3. Crossovers. When a short average crosses above a long one (like 50-day above 200-day), it is called a golden cross. The opposite is a death cross. These names sound dramatic, but they are slow signals – they confirm a trend that has already started.
4. Distance from the average. When price is very far above its average, it is stretched. It often comes back closer, either by falling or by moving sideways for a while.
11.4 Popular settings
- 20-day – short-term trend, used a lot by swing traders.
- 50-day – medium-term trend.
- 200-day – long-term trend. Big funds watch it closely.
In a range, price keeps crossing above and below the average. Every cross looks like a signal, and most fail. Moving averages work best in trending markets. If price is crisscrossing a flat average, the average is telling you: "No trend here."
I like keeping one or two averages, not five. Chart saaf rakho. A rising 50-day average with price above it already tells you most of what you need about the trend.
Price above a rising average is a sign that buyers are in control on that timeframe.
The EMA reacts faster because recent prices count more.
In ranges, price keeps crossing the average, creating many false signals.
- A moving average smooths prices to show direction. SMA = simple average; EMA = more weight to recent prices.
- Use them for trend direction, dynamic support/resistance, crossovers and spotting stretched prices.
- Common settings: 20, 50 and 200 days.
- They work best in trends and poorly in ranges.
- Ek line mein: Moving average shor kam karke direction dikhata hai – trend mein kaam ka hai, sideways mein dhoka deta hai.