Moving averages
Lesson 13 of 23 in the course “Technical Analysis”. Free, with animations and a quiz.
A line that smooths out the noise
A moving average is the average close of the last N candles, recalculated on every new candle. The simple one (SMA) weighs all candles equally; the exponential one (EMA) gives more weight to recent ones, so it turns faster. An average always lags: it shows what already happened, not what’s next.
20, 50 and 200
The most popular periods are 20, 50 and 200. They work not because of magic numbers but because millions of people and funds watch them. Price above the 200-day average is the usual sign of a long-term bull market, below it of a bear market. The slope matters too: if the average is flat, there’s no trend.
The golden and the death cross
When the 50-day average crosses the 200-day from below, it’s a golden cross; from above, a death cross. The news loves them. The key thing: it’s a lagging signal, price has already covered part of the move by the time of the cross. So a cross is good as a direction filter, not as an entry point.
The average as a floor
In a strong trend price often pulls back to a short average, like EMA 20, and bounces off it. That’s moving support. But an average is a zone, not an exact line, and in a range it’s useless: price saws back and forth across it. Averages are good when there’s a trend and lie when there isn’t.
Check yourself
- How does an EMA differ from an SMA?
Correct answer: Recent candles weigh more, so the EMA reacts faster. Both averages lag, but the EMA less so: it weighs the latest candles more. - Price has been above the 200-day average for three months and the average is rising. What does it say?
Correct answer: A long-term uptrend. Price above a rising 200-day is the classic sign of a long-term bull market. It’s a backdrop where buys make more sense. - Why is it hard to enter on a golden cross?
Correct answer: It lags: part of the move is already over. Averages are built from past prices, so their cross is a late confirmation. It’s a direction filter; entries come from levels and pullbacks.