Stock Market · Technical Analysis

Moving averages

What is a moving average?

A moving average smooths out price data by calculating the average price over a set number of periods. It removes the 'noise' of day-to-day fluctuations so you can see the actual trend direction.

Simple Moving Average (SMA)

SMA takes the closing prices over N days and divides by N. A 20-day SMA = sum of last 20 closing prices ÷ 20.

Each day, the oldest price drops out and the newest one enters. Hence 'moving.' The SMA responds slowly to recent price changes.

Exponential Moving Average (EMA)

EMA gives more weight to recent prices. If today's price spikes, the EMA reacts faster than the SMA. This makes EMA more useful for shorter-term trading.

> EMA is more reactive. SMA is smoother. Neither is 'better'. It depends on your use case.

Common periods

• 9 EMA / 13 EMA, short-term traders, intraday
• 20 SMA. Swing traders (one month of trading days)
• 50 SMA. Medium-term trend (two months)
• 200 SMA. Long-term trend (the most watched moving average)

How to use moving averages

1. Trend direction: Price above the MA = uptrend. Price below = downtrend.

2. Dynamic support/resistance: Price often bounces off MAs during trends.

3. Crossovers: When a shorter MA crosses above a longer MA, it's a bullish signal (and vice versa).

200 SMAthe line that separates long-term bulls from bears. Widely watched by institutions.

The one rule

Moving averages are LAGGING indicators. They're based on past prices. They confirm trends; they don't predict them. A MA tells you a trend exists, not that it will continue.

Takeaway. SMA = equal weight to all days; EMA = more weight to recent days. Both smooth price and reveal trend direction.