SMA
The Simple Moving Average (SMA) is the arithmetic mean of a security's closing prices over a specified number of periods. The 50-day and 200-day SMAs of Nifty 50 have historically been referenced as key trend benchmarks by Indian market participants.
The SMA is calculated by summing closing prices over the lookback window and dividing by the number of periods. Each day, the oldest price drops out of the calculation and the newest price is added, hence the term 'moving.' This equal weighting of all periods in the window is the defining feature of the simple moving average.
Because all periods receive equal weight, the SMA responds more slowly to recent price changes than the EMA. A sharp one-day move in Nifty will affect the 50-day SMA by only 1/50th of its magnitude, meaning the SMA moves gradually and smoothly. This characteristic makes the SMA a useful reference for assessing broad trend direction but less useful for capturing short-term momentum shifts.
On NSE equity charts, the 20-day SMA was commonly used as a reference for short-term trend assessment in daily charts, the 50-day for medium-term trend, and the 200-day for the long-term structural trend. These periods have no theoretical optimality; they became conventions through widespread adoption by practitioners over time.
The SMA has an inherent drop-off effect: when a large price observation from the beginning of the lookback window drops out and is replaced by a new price at the end, the average can shift noticeably. For example, if a sharp rally occurred 200 days ago and that period drops out of the 200-day SMA calculation, the SMA may dip even if recent prices are stable. This mechanical artefact can create misleading signals if the drop-off is interpreted as a directional trend.
A misconception is that the SMA represents a meaningful price level at which buying or disposing activity concentrates. Moving averages are mathematical constructs, not fundamental price levels. Their significance as support or resistance, to the extent it exists historically, likely reflects self-fulfilling behaviour from the large number of market participants monitoring the same levels rather than any intrinsic market structure.