Moving Averages
Moving averages smooth price to show the trend. Learn the difference between SMA and EMA, popular periods like 20, 50 and 200, and how to use them for trend and dynamic support.
Full name
Simple and Exponential Moving Averages (SMA, EMA)
Default settings
20, 50 and 200 periods
Formula
SMA = sum of last N closes / N; EMA = price × k + previous EMA × (1 − k), where k = 2 / (N + 1)
What a moving average does
A moving average replaces each price with the average of the last N prices, which smooths out noise so you can see the trend. When price is above a rising average, the trend is up. Below a falling average, it's down.
SMA vs EMA
A simple moving average (SMA) weights every bar equally. An exponential moving average (EMA) gives more weight to recent bars, so it reacts faster but also gives more false signals. Neither is better; they suit different jobs.
Popular periods
- 20 EMA: short-term trend, often used for pullback entries by day and swing traders.
- 50 SMA/EMA: medium-term trend.
- 200 SMA: the long-term trend that many institutions watch on the daily chart.
Ways to use them
Trend filter
The simplest rule: only buy when price is above the 200-day average and only sell when it's below. This alone stops many counter-trend mistakes.
Dynamic support and resistance
In healthy trends, price often pulls back to the 20 or 50 average before continuing. These are zones, not exact lines.
Crossovers
A 50-day crossing above the 200-day is called a golden cross; crossing below is a death cross. They're slow signals that appear well after a move has started, and they whipsaw in sideways markets.
Common mistakes
- Using moving averages in a choppy range, where price crosses them constantly.
- Stacking five or six averages until the chart says whatever you want.
- Treating an average as an exact price level.
For a rules-based way to trade with averages, read the trend following strategy.
Indicators work best inside a plan
See which strategies use this indicator, then size the trade before you enter.