Moving Averages (SMA & EMA)
Trend-following indicators that smooth price data to show the average price over a specific period.
Plain English Explanation
Moving averages smooth out the noise in price to show you the underlying trend. Think of them as the "trend line that automatically updates."
**Two main types:**
- **SMA (Simple):** Treats all prices equally - slower, smoother
- **EMA (Exponential):** Gives more weight to recent prices - faster, more responsive
**Popular periods and what they show:**
- **9-21 EMA:** Short-term trend (days to weeks)
- **50 SMA/EMA:** Medium-term trend (weeks to months)
- **200 SMA:** Long-term trend (months to years)
**Basic signals:**
- Price above MA = Bullish bias
- Price below MA = Bearish bias
- Fast MA crosses above slow MA = Bullish ("Golden Cross" for 50/200)
- Fast MA crosses below slow MA = Bearish ("Death Cross" for 50/200)
**The 200 SMA is special:** Institutions watch it closely. When price is above, they're generally bullish. Below, bearish.
How It Works (Technical)
SMA adds up closing prices for X periods and divides by X. EMA applies a multiplier that gives more weight to recent prices, making it react faster to new data. Both create a line that follows price with a lag.
When It Works Best
- Identifying trend direction
- Dynamic support and resistance levels
- Trend-following strategies
- Filtering out noise on lower timeframes
- Determining bias for the day/week
When It Fails
- Choppy, sideways markets (whipsaws galore)
- Fast-moving news-driven markets
- When used for precise entry/exit timing
- Very short periods on high timeframes
- Markets that frequently gap
Common Beginner Mistakes
- 1Using too many moving averages (analysis paralysis)
- 2Trading crossovers without confirming the trend
- 3Expecting MAs to predict moves (they lag by design)
- 4Using the same settings for all timeframes/assets
- 5Ignoring the slope of the moving average
Pro Tips
- Use MA slope to gauge trend strength (steeper = stronger)
- Multiple timeframe analysis: align daily MA with 4H MA
- Watch how price reacts at MAs - bounces show respect
- 21 EMA on daily is widely watched by swing traders
- Use MAs for bias, but price action for entries
Related Indicators
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