A moving average (MA) smooths price by averaging the last few closes and redrawing that average as each new candle closes. It filters out noise so you can see the direction of the trend, and it is the most widely used indicator in the world.
Simple and exponential
A simple moving average (SMA) gives every close in the period equal weight: a 20 SMA is the average of the last 20 closes. An exponential moving average (EMA) gives more weight to recent closes, so it reacts faster to new moves and turns sooner.
Worked example: a 5-period SMA
The last five closes are 1.0820, 1.0835, 1.0830, 1.0850 and 1.0865.
SMA = (1.0820 + 1.0835 + 1.0830 + 1.0850 + 1.0865) ÷ 5 = 1.0840.
When the next candle closes, the oldest close (1.0820) drops out and the new one is added.
How traders use moving averages
Trend direction
Price above a rising average suggests an uptrend; price below a falling average suggests a downtrend. Many traders only look for buys when price is above the 200-day moving average, and only sells when it's below.
Dynamic support and resistance
In a steady trend, pullbacks often stall near a popular average such as the 20 or 50 EMA. Unlike a horizontal level, the average moves with price.
Crossovers
When a faster average crosses above a slower one, momentum has turned up; crossing below means it has turned down. The 50-day crossing above the 200-day is famous enough to have a name, the golden cross. Its bearish counterpart is the death cross.
| Average | Common use |
|---|---|
| 9 / 10 / 20 EMA | Short-term trend and pullback entries for intraday and swing traders |
| 50 SMA or EMA | Medium-term trend; a popular pullback level |
| 200 SMA | Long-term trend filter, watched by funds and the financial press |
| VWAP | Intraday average weighted by volume, covered in Module 7 |
Key takeaways
- A moving average smooths price by averaging recent closes; EMAs weight recent prices more and react faster than SMAs.
- Use averages to judge trend direction, as dynamic support and resistance, and for crossovers.
- The 50/200 golden cross and death cross are the best-known crossover signals.
- All averages lag and produce false signals in ranges; use them in trending markets.