What Are Moving Averages?

Moving averages smooth out price data to reveal underlying trends by calculating the average price over a specific number of periods. They're the most widely used technical indicators and form the basis of many algorithmic trading strategies.

Types of Moving Averages

Simple Moving Average (SMA)

The arithmetic mean of prices over a period. Each price point has equal weight.

SMA Formula
SMA = (P1 + P2 + P3 + ... + Pn) / n

Example: 10-day SMA
Sum of last 10 closing prices / 10

Exponential Moving Average (EMA)

Gives more weight to recent prices, making it more responsive to new information. Widely used in indicators like MACD.

EMA Formula
EMA = (Price × k) + (Previous EMA × (1 - k))

Where k = 2 / (n + 1)
For 10-period EMA: k = 2 / 11 = 0.1818

Common Moving Average Strategies

Golden Cross / Death Cross

Perhaps the most famous moving average strategy:

Golden Cross / Death Cross Rules

  • Golden Cross (Buy): 50-day MA crosses above 200-day MA
  • Death Cross (Sell): 50-day MA crosses below 200-day MA
  • Timeframe: Daily charts for swing/position trading
  • Note: These are lagging signals—by the time they trigger, significant price movement has already occurred

Moving Average Envelope

Bands placed a fixed percentage above and below a moving average to identify overbought and oversold conditions.

Choosing the Right Period

Period Responsiveness Best For
5-10 Very fast Short-term/day trading
20-50 Medium Swing trading
100-200 Slow Long-term trends, support/resistance

Limitations

  • Lagging indicator: Moving averages follow price—they don't predict it
  • Whipsaws: In choppy markets, frequent false signals occur
  • No magic number: The "best" period varies by market and timeframe