Moving average
Also written Simple moving average · SMA
The average price of a share over a rolling window, recalculated each session — it smooths away daily noise so that the underlying trend, and changes in it, become visible.
In plain language
Daily closing prices jump around for reasons that have nothing to do with where the share is heading — a large order, a news flash, a quiet afternoon.
A moving average takes the last few closes, averages them, and repeats the exercise tomorrow with the newest close replacing the oldest. The resulting line turns far more slowly than the price, which is the entire point: it shows the direction rather than the noise.
How it works
The window length is a choice, and it trades responsiveness against reliability. A 20-day average hugs the price and turns quickly, producing many signals and many false ones. A 200-day average is slow and is used to define the primary trend.
A simple moving average weights every day in the window equally. An exponential moving average weights recent days more heavily and therefore turns sooner — sooner, not more accurately.
Chartists read the line three ways: price crossing above or below it, the slope of the line itself, and one average crossing another — the 50-day rising through the 200-day is the golden cross, falling through it the death cross. Every one of these is lagging by construction, because an average can only describe prices that have already happened.
The formula
SMA(n) = (P₁ + P₂ + ... + Pₙ) ÷ n
Each session the newest close enters the window and the oldest drops out.
A worked example
A bank share closes over five sessions at Rs 482, 488, 479, 495 and 501.
5-day SMA = (482 + 488 + 479 + 495 + 501) ÷ 5 = 2,445 ÷ 5 = Rs 489.0
The next session it closes at Rs 512. Drop the 482, add the 512:
5-day SMA = (488 + 479 + 495 + 501 + 512) ÷ 5 = 2,475 ÷ 5 = Rs 495.0
Price is above a rising average — an uptrend on this measure.
Now watch the lag do its damage. The share peaks at Rs 512 and slides to Rs 470 over the next six sessions. The five-day average does not turn down until the third of those sessions, by which point Rs 30 of the fall has already happened. On a 20-day average it would take longer still. And in a share going sideways, the price crosses its 20-day average again and again, generating a run of signals that lose a little money each time — which is why a moving average is a trend tool and nothing else.
Why NISM asks about it
Moving averages are introduced in Chapter 4 (Fundamentals of Research) and used throughout Chapter 15's technical analysis. Expect a short price series to average, and the simple versus exponential distinction.
Common exam traps
- It lags by construction. No moving average can anticipate a turn; any option claiming it predicts one is wrong.
- An EMA reacts faster than an SMA of the same length. Faster is not the same as better — it also produces more false signals.
- In a range-bound market moving averages whipsaw. They only work where there is a trend to follow.
- The window length is the analyst's choice, not a property of the share. Two lengths can give opposite signals on the same chart on the same day.
- A moving average is a statistic, not a floor. It is often treated as support, but nothing obliges the price to respect it.
Check yourself
1.In technical analysis, the impact of day-to-day fluctuations in prices is smoothened by which of the following?
- a)Increasing the time period of price charts
- b)Using a liquidity parameter along with prices
- c)Using moving averages
- d)None of the above
Show the answer
Answer: (c) Using moving averages
This is one of the workbook's own sample questions. The text states: typically, chartists use moving average of the price of the stock to reduce the impact of day-to-day fluctuations in prices that may make it difficult to identify the trend.
Option A is the designed trap — stretching the chart period changes what you see, but the workbook names the moving average as the smoothing device. Option B invents a technique the workbook does not describe; volume, not liquidity, is the parameter technical analysis pairs with price, and volume is used to confirm trend strength, not to smooth fluctuations.
2.Which statement about moving averages is consistent with the workbook?
- a)Moving averages are leading indicators that anticipate turns before price
- b)Moving averages are lagging indicators but are very useful in identifying major trends
- c)A moving average is calculated from the highest price of each period
- d)Moving averages should only ever be used on intraday charts
Show the answer
Answer: (b) Moving averages are lagging indicators but are very useful in identifying major trends
The workbook states it plainly: MAs are lagging indicators but are very useful in identifying major trends.
Option A inverts this. The chapter’s leading candidates are elsewhere — the MACD "at times serves as a leading indicator", and the RSI "can be a lead indicator".
Option C is wrong on the input: a moving average is "the average of daily or weekly or monthly closing prices". Option D contradicts the chapter, which uses the 50 and 100 DMA for primary trends and recommends that monthly, weekly and daily MAs all point the same way before you trust a trend.
3.Which statement about the primary trend is consistent with the workbook?
- a)It is the dominant long-term movement, typically lasting one year or more, and is largely driven by macro-level forces such as economic cycles and monetary and fiscal policy
- b)It typically lasts three weeks to three months and is driven mainly by earnings surprises and sector-specific news
- c)It is best identified with 5-day, 10-day and 20-day EMAs
- d)It can only be a bull or a bear market; a range-bound market does not count as a primary trend
Show the answer
Answer: (a) It is the dominant long-term movement, typically lasting one year or more, and is largely driven by macro-level forces such as economic cycles and monetary and fiscal policy
The primary trend is "the dominant, long-term movement in the price of a financial asset or market index … over an extended period of time, typically one year or more." Its underlying drivers are "macro-level forces such as: economic cycles (growth vs recession), monetary policy (interest rates, liquidity), fiscal policy (taxation, government spending), geopolitical stability, investor psychology".
Option B is the secondary trend on both counts — it lasts "3 weeks to 3 months and sometimes more", and "earnings surprises or sector-specific news" are listed among its catalysts. Option C lists the tools for the tertiary trend ("5-day, 10-day, or 20-day EMAs for trend confirmation"); for primary trends the workbook names moving averages "like 50 or 100 DMA". Option D ignores the third category in the workbook’s table: sideways or rangebound, where prices fluctuate within a horizontal range and sentiment is "neutral or uncertain".
Where this is taught
Free preparation for NISM Series XVRelated terms
- ChannelTwo parallel trendlines, one through the highs and one through the lows, boxing price action into a range — traders trade within it, or watch for a breakout from it.
- Primary trendThe dominant, long-term direction of a market or stock — bull, bear or sideways — typically lasting a year or more, driven by macro-economic forces and investor sentiment.
- RSIA momentum oscillator scaled 0 to 100 that measures the speed and size of recent price changes — conventionally read as overbought above 70 and oversold below 30.
- Support and resistancePrice levels where a move tends to pause or reverse — support where demand concentrates and forms a floor, resistance where supply concentrates and forms a ceiling.
- Technical analysisForecasting price direction from past price and volume alone, on the assumption that everything worth knowing about a company is already in its price.
- MACDMoving Average Convergence Divergence — the gap between the 12- and 26-period EMAs, read against its own 9-period EMA, to track shifts in momentum rather than price.
- Dow TheoryCharles Dow's six-tenet framework: the market discounts everything, moves in primary, secondary and tertiary trends, must be confirmed by indices and volume, and trends persist until clearly reversed.
- ChartistA trader who bases buy and sell decisions on historical price and volume patterns and their tendency to repeat, rather than on a company's underlying financial performance.
- ADXAn oscillator running from zero to 100 that measures how strong a trend is, without indicating whether that trend is up or down.
- Bar chartA technical-analysis chart showing each period's Open, High, Low and Close as a single vertical bar with side ticks — used to study price range and volatility.
- Renko chartA chart built from fixed-size price "bricks" instead of time intervals, used to filter out minor price noise and make the underlying trend easier to read.
- Secondary trendAn intermediate correction or rally that runs counter to the dominant primary trend, typically lasting a few weeks to a few months, before the primary trend resumes.
- Heikin-Ashi chartA chart of adjusted candlesticks that average price data to reduce noise, giving a clearer view of the trend and helping a trader stay in a position through whipsaws.
- Tertiary trendThe smallest of Dow Theory's three trends — a short-term move of a few days to a few weeks, often running against the primary or secondary trend.
- Bollinger bandsA technical indicator that plots bands a set number of standard deviations either side of a moving average, treating prices at the upper band as overbought and at the lower band as oversold.