Moving Averages
Simple vs exponential moving averages, and how they're used to identify trends.
⏱️ ~6 min read
Key Takeaways
- A moving average smooths out price data by averaging it over a specified number of periods
- A simple moving average (SMA) weights all periods equally; an exponential moving average (EMA) weights recent periods more heavily
- Moving averages are often used to identify trend direction and as dynamic support/resistance levels
- Crossovers between different moving averages (or price and a moving average) are commonly watched signals
What a moving average does
A moving average takes the average price over a specified number of recent periods (e.g., the last 50 days) and plots that average as a line on the chart. As each new period completes, the average updates — 'moving' forward — dropping the oldest period and adding the newest.
Because it's an average, a moving average smooths out the day-to-day noise in price movements, making underlying trends easier to see than looking at raw price data alone.
Simple moving average (SMA)
A simple moving average (SMA) is calculated by adding up the closing prices for the chosen number of periods and dividing by that number — every period in the window contributes equally to the average.
Example: 5-day SMA
Closing prices over 5 days: $100, $102, $101, $105, $107.
5-day SMA = ($100 + $102 + $101 + $105 + $107) ÷ 5 = $515 ÷ 5 = $103.
Tomorrow, if the price closes at $110, the new 5-day SMA would drop the oldest value ($100) and add the newest ($110): ($102 + $101 + $105 + $107 + $110) ÷ 5 = $525 ÷ 5 = $105.
Exponential moving average (EMA)
An exponential moving average (EMA) also averages recent prices, but applies greater weight to more recent periods and progressively less weight to older periods, using a mathematical formula (a 'smoothing factor'). This means an EMA tends to react more quickly to recent price changes than an SMA of the same length, which can be both an advantage (more responsive) and a disadvantage (more prone to reacting to short-term noise), depending on the goal.
Common uses: trend direction
When the price is consistently above a longer-term moving average (such as the 200-day) and that average is sloping upward, some traders interpret this as a sign of an overall uptrend. The reverse — price below a downward-sloping long-term average — is sometimes interpreted as a downtrend. Shorter-term moving averages (like 20-day or 50-day) are sometimes used to gauge shorter-term trend direction.
Crossovers
A 'crossover' occurs when one moving average crosses above or below another (or when price crosses a moving average). A commonly referenced example is the 'golden cross' — when a shorter-term moving average (e.g., 50-day) crosses above a longer-term moving average (e.g., 200-day), sometimes interpreted as a potential bullish signal. The opposite — shorter-term crossing below longer-term — is sometimes called a 'death cross' and interpreted as potentially bearish.
Like other technical signals, crossovers are observed patterns, not guarantees — they can occur well after a trend has already been underway (since moving averages are inherently 'lagging,' based on past prices), and can also produce false signals during choppy, sideways markets.
Choosing a moving average length
Shorter moving averages (e.g., 10- or 20-day) are more sensitive to recent price changes and may generate more frequent signals, some of which may be 'false' in choppy markets. Longer moving averages (e.g., 100- or 200-day) are smoother and may better reflect longer-term trends, but react more slowly to actual trend changes. There's no single 'correct' length — the choice often reflects the time frame relevant to the trader's strategy.
Frequently Asked Questions
Why is the 200-day moving average so commonly referenced?+
It's widely used as a rough proxy for the long-term trend (roughly representing about 10 months of trading days), and its widespread popularity among market participants means many traders watch the same level, which can itself influence how price behaves around it.
Do moving averages predict future prices?+
Moving averages are calculated from past prices and are inherently 'lagging' indicators — they describe what has already happened and can help visualize trends, but they don't directly predict future price movement.
Is EMA always better than SMA?+
Neither is universally 'better' — EMA's faster responsiveness can help identify trend changes sooner but may also produce more false signals in choppy markets, while SMA's smoother nature can reduce noise but react more slowly. The choice often depends on the trader's specific approach and time frame.