A moving average is a smoother, not a prediction machine
A moving average transforms a sequence of prices into a smoother series. It helps describe trend and reduce short-term noise, but it necessarily reacts after prices have already moved.
SMA versus EMA
A simple moving average gives equal weight to observations in its window. An exponential moving average gives more weight to recent observations, so it generally reacts faster to new price information.
Why the period matters
A 10-period average responds much faster than a 200-period average. There is no universally correct period. The appropriate choice depends on timeframe, market behaviour and the purpose of the analysis.
Worked example
For a 5-day SMA, if the five closing prices are ₹100, ₹102, ₹101, ₹105 and ₹107, the average is ₹103. If tomorrow's close is ₹110, the oldest observation drops out and the new average becomes ₹105. The line changes because the calculation window changed, not because the average “knows” the future.
Common uses
- Describe trend direction.
- Compare short and long trend regimes.
- Use as a dynamic reference area.
- Construct crossover rules.
What moving averages cannot tell you
They cannot establish intrinsic value, predict a catalyst, or guarantee that a crossover will work. In sideways markets, repeated crossovers can create many false signals.
Better interpretation
Ask whether price is above/below the average, whether the average itself is rising/falling, whether several timeframes agree, and what the market structure says. Then define the risk rule separately.