Moving Average
A moving average is a line on a chart that shows the average price over a fixed number of recent periods, such as the last 20 days. As each new period closes, the oldest one drops out, so the average moves along with the price.
How a moving average works
Take the closing prices of the last 20 days and calculate their average. Tomorrow, add the new close and drop the oldest one, then calculate again. Plot each result and you get a smooth line that follows price but filters out much of the day-to-day noise.
The number of periods sets the character of the line. A short average, such as 10 periods, reacts quickly but is jumpy. A long average, such as 200 periods, is smooth and slow. The period also depends on the chart's timeframe: 50 periods on an hourly chart is about two days.
The main types
The simple moving average (SMA) weights every period equally. The exponential moving average (EMA) gives more weight to recent prices, so it reacts faster to new moves. Other variants exist, but these two are the most widely used.
How traders use them
The slope gives a quick read on the trend: a rising average suggests an uptrend, a falling one a downtrend. Price holding above a widely watched average, such as the 200-day, is often read as a sign of strength.
Crossovers are another common use. When a shorter average crosses above a longer one, some traders see it as a bullish signal; the cross of the 50-day above the 200-day is popularly called a golden cross, and the reverse a death cross.
Limits and mistakes
Moving averages lag by design, because they are built from past prices. By the time a crossover appears, much of the move may be over. In sideways markets, price chops back and forth across the line and crossovers produce many false signals.
Say a coin trades between 90 and 110 for months. Its 20-day average will hover around 100, and price will cross it repeatedly without any trend following. The tool works best as a description of trend, not as a stand-alone trading system.
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Frequently asked questions
What is the 200-day moving average?
The average closing price of the last 200 daily candles. It is widely watched as a gauge of the long-term trend, which can make it a level many traders react to.
Which is better, SMA or EMA?
Neither is better in general. The EMA reacts faster but gives more false signals; the SMA is smoother but slower. The choice depends on your timeframe and purpose.
Do moving averages predict price?
No. They summarise past prices and lag behind. They can help describe the trend, but they do not forecast what comes next.
Related terms
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