Trading Defined
Indicators and ToolsBeginner

Moving AverageMA

A moving average is the average price over a fixed number of recent periods, recalculated each period to smooth out short-term noise.

A moving average turns a jagged price chart into a smooth line, so the direction underneath the noise is easier to see. It is probably the most widely used indicator in trading: the 50-day and 200-day averages are quoted in market news, and many other indicators, including MACD and Bollinger Bands, are built from moving averages. This entry shows how to calculate the two main types, how traders use them, and why every moving average is always late.

Category
Indicators and Tools
Reading time
7 min
Also called
Simple moving average, Exponential moving average, 200-day moving average
Updated

A moving average in plain words

Take the last 10 closing prices, add them up and divide by 10. That is a 10-period simple moving average. Tomorrow, drop the oldest price, add the newest, and calculate again. Plotted bar by bar, the averages form a line that “moves” along the chart.1

Because it averages many prices, the line is smoother than the price itself — and it always reacts after the price has moved. The longer the period, the smoother the line and the bigger that delay.1

How to calculate and use a moving average, step by step

  1. Choose the period

    Short periods (10–20) follow price closely; long periods (100–200) show the big picture. A 200-bar average is a common proxy for the long-term trend and a 50-bar for the intermediate trend.1

  2. Choose the type

    A simple moving average (SMA) weights every price equally. An exponential moving average (EMA) gives more weight to recent prices, so it follows price more closely and turns sooner.2

  3. Read the slope

    A rising average suggests an uptrend; a falling one a downtrend.1 A flat, tangled average usually means a sideways market.

  4. Watch price relative to the average

    Price holding above a rising average is typical of an uptrend. In trends, a rising average often acts as support and a falling one as resistance.2

  5. Use crossovers with care

    A short average crossing above a long one is a common buy signal, and crossing below a sell signal.1 The 50-day crossing the 200-day is called a golden cross (up) or a death cross (down).

  6. Accept the lag

    Moving averages are not designed to catch exact tops and bottoms; they help you trade in the direction of a trend, with a delay at entries and exits.2

Worked examples

Example 1 — Calculating a 5-day SMA

SMA

A stock’s last five closes are $20, $21, $22, $21 and $23. The next day it closes at $24.

Example 1 — Calculating a 5-day SMA — calculation
SMA today($20 + $21 + $22 + $21 + $23) ÷ 5 = $21.40
Tomorrow: drop $20, add $24($21 + $22 + $21 + $23 + $24) ÷ 5 = $22.20
Change in the average+$0.80

The price rose $1 on the day, but the average rose only $0.80 — the new price is diluted by the four older ones. That is the smoothing, and the lag.

Example 2 — The same day as a 5-day EMA

EMA

For a 5-period EMA the weight on the newest price is 2 ÷ (5 + 1) = 0.333. Yesterday’s EMA was $21.40; today’s close is $24.

Example 2 — The same day as a 5-day EMA — calculation
FormulaEMA = previous EMA + k × (price − previous EMA)
Calculation$21.40 + 0.333 × ($24 − $21.40)
EMA today≈ $22.27

The EMA moved to $22.27, slightly more than the SMA’s $22.20, because it puts more weight on the newest price.2 The difference grows when prices move fast.

Example 3 — A crossover that came too late

Lag

A stock rises from $50 to $70, and the 10-day SMA crosses above the 30-day SMA when the price is already $63. The rally peaks at $71, then falls back; the averages cross down at $62.

Example 3 — A crossover that came too late — calculation
Bought on the up-cross$63
Sold on the down-cross$62
Result per share−$1 on a $20 move

Both signals were “correct”, yet the lag consumed the whole move. Crossovers work best in long, strong trends and lose money in choppy markets.

Figure 1

A fast and a slow moving average

Price with a 10-period and a 30-period simple moving averageThe price swings up and down. The 10-period average follows it closely; the 30-period average is smoother and turns later. Where the fast average crosses below the slow one the chart marks a death cross, and where it crosses back above, a golden cross. Both crosses come well after the price has already turned.Price10-period SMA30-period SMAgolden crosstime →
The 10-period average follows the price closely; the 30-period average is smoother and turns later. Crossovers are marked — each arrives after the price has already turned.

Simple vs. exponential moving average

AspectSMAEMA
WeightingEvery price in the period equallyMore weight on recent prices2
ReactionSlower, smootherFaster, turns sooner2
False signalsFewerMore short-term changes2
Typical useLong-term trend (50, 100, 200)Shorter-term trading (9, 12, 20, 26)

How traders use moving averages

  • Trend filter

    Only buying when price is above a rising long-term average keeps you on the side of the main trend. See Trend.

  • Dynamic support and resistance

    In trends, pullbacks often pause near a rising average, which gives a reference for entries and stops. See Support and Resistance.

  • Crossover systems

    Two averages crossing gives simple, rule-based entries and exits — useful in trends, costly in ranges.

  • Building blocks

    Many indicators are made from moving averages, including MACD and Bollinger Bands.

Advantages and disadvantages

Advantages

  • Simple to calculate and available on every platform.
  • Makes the trend direction easy to see.
  • Objective: everyone using the same settings sees the same line.

Disadvantages

  • Always lags price; signals arrive after the move has started.
  • Produces repeated false signals in sideways markets.
  • No period is “correct”; results depend heavily on the setting.
  • Popular levels like the 200-day can attract crowded reactions that do not hold.

Going deeper

Read as far as you need. Each level builds on the one before it.

Start with one or two averages

Beginner

A single 50- or 200-day average on a daily chart answers the first question: is the long-term trend up or down? Adding many averages rarely adds information.

Weighted, smoothed and ribbons

Intermediate

A weighted moving average (WMA) gives linearly more weight to recent prices; a smoothed moving average applies very slow, Wilder-style smoothing. A moving average ribbon draws many averages of different lengths together: when they fan out in order the trend is strong, and when they tangle the market is ranging.

The EMA formula and its memory

Advanced

An EMA is calculated as previous EMA + k × (price − previous EMA), where k is usually 2 ÷ (n + 1). The first value is commonly seeded with an SMA.2 Because each value includes the previous one, an EMA in theory remembers every past price, with older prices fading towards zero weight.

Two platforms can show slightly different EMAs for the same settings if they start the calculation at different points in the data.

Common mistakes

  1. Expecting exact tops and bottoms

    Moving averages confirm trends after they start; they do not predict turning points.

  2. Trading crossovers in a range

    When averages are flat and tangled, crossovers whipsaw back and forth and rack up losses.

  3. Optimising the period to past data

    The “perfect” setting on last year’s chart is usually luck. See Overfitting.

  4. Treating the line as a hard level

    Price often pierces an average before respecting it. Treat it as a zone.

Check your understanding

Test yourself before moving on. Each answer comes with an explanation.

Q1Closes: $10, $11, $12, $13, $14. What is the 5-period SMA?
Q2Why does an EMA react faster than an SMA of the same length?

Key points to remember

  1. A moving average is the average price over the last N periods, recalculated each period.
  2. SMAs weight all prices equally; EMAs weight recent prices more and turn sooner.
  3. Longer periods are smoother but lag more.
  4. Slope and price position show the trend; crossovers generate signals.
  5. Moving averages work in trends and whipsaw in ranges.

Frequently asked questions

What is the best moving average?

There is no best one. The 200-day and 50-day SMAs are the most widely watched for long and intermediate trends; shorter EMAs suit faster trading. Choose settings that fit your timeframe and keep them consistent.

What are a golden cross and a death cross?

A golden cross is when the 50-day moving average crosses above the 200-day; a death cross is when it crosses below. They are widely reported but, like all crossovers, they lag the price.

Should I use the closing price?

Most moving averages use closing prices, and that is the usual default. Some traders use the typical price (high + low + close ÷ 3) instead.

Further learning

Sources

This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.

  1. Fidelity. Simple Moving Average (SMA) (opens in a new tab) Checked .
  2. Fidelity. Exponential Moving Average (EMA) (opens in a new tab) Checked .

Read more elsewhere

Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.