Chapter 26 · Moving Averages
Choosing a length, and using an average as support
Picking n from your holding period, dynamic support, ribbons, and why crossovers whipsaw.
Moving-average periods were chosen decades ago for deep, fast markets. NEPSE trades a four-hour session with circuit limits, and many shares go days without a meaningful trade — so a long average on a thinly traded Nepali stock is averaging stale prices, not smoothing live ones.
A moving average against price
Every argument about which moving average is best is really an argument about holding period. The average does not know what it is describing; you have to tell it, by choosing n.
Choosing n from the decision you are making
| If you hold for | A reasonable filter | Because |
|---|---|---|
| Years | 200-day | Lags about 100 days — the right resolution for a multi-year view |
| Months | 50-day | Lags about 25 days |
| Weeks | 20-day EMA | Lags about 10 days |
| Days | 10-day EMA | Responsive, and noisy in proportion |
The lag of an n-period average is roughly (n − 1) ÷ 2 periods. That is not a defect — it is the definition of smoothing. Choosing n is choosing how much lag you are willing to accept in exchange for how little noise.
An average as dynamic support
In a strong trend, pullbacks often stop near a widely-watched average. This is partly self-fulfilling and none the less real for it — enough participants place orders there to make it so.
- The 20-day EMA tends to contain pullbacks in a fast advance.
- The 50-day contains deeper pullbacks in a steadier one.
- Losing the 200-day after months above it is a regime change worth respecting, whatever your view.
- Treat all three as zones, not lines — price rarely turns at the exact value.
Worked: has the trend actually changed?
A share closes at Rs 452. Its 20-day EMA is Rs 466, the 50-day SMA Rs 448, the 200-day SMA Rs 405.
- Price is below the 20-day: the short-term push is over.
- Price is above the 50-day and well above the 200-day: the intermediate and primary trends are intact.
- Price ÷ 200-day = 452 ÷ 405 = 1.116 — 11.6% above the long-term average, a normal position in an uptrend rather than an extended one.
- Reading: a pullback inside an uptrend. The averages disagree because they are measuring different horizons, which is what they are for.
Golden cross and death cross
Ribbons
Plotting several averages together turns spacing into information. Widely separated and correctly ordered means a committed trend; compressed and tangled means the horizons disagree, which is the condition in which crossover signals fail.
Saved in this browser only — there is no account to create. Clearing your browser data clears your progress.