Moving averages (SMA and EMA)

What it is

A moving average is the average closing price over the last N candles, redrawn on each new candle. The simple moving average (SMA) weights them equally; the exponential moving average (EMA) weights recent candles more, so it reacts faster.

Popular lengths are the 20 and 50 for short-term trend and the 200 for the long-term trend. A faster average crossing a slower one is called a crossover; on daily charts the 50 crossing above the 200 is known as a golden cross, and crossing below it a death cross.

How to spot it

• Price above a rising average: uptrend. Below a falling one: downtrend.
• Price whipping back and forth across a flat average: a range.

How to use it

• In a trend, use pullbacks to a moving average as areas to look for entries in the trend's direction.
• Use crossovers as a trend filter, not as entries on their own: they lag by design.

Common mistakes

• Trading every crossover in a ranging market.
• Hunting for the 'perfect' length instead of using a common one consistently.

Related