Moving Averages Explained

What Are Moving Averages?

A moving average (MA) is the average price of an asset over a specific number of periods. It "moves" because it is recalculated with each new candle, dropping the oldest data point and adding the newest. Moving averages smooth out price noise and reveal the underlying trend direction.

They are the most widely used technical indicator in trading — and for good reason. They are simple, effective, and form the foundation of many professional trading systems.

SMA vs EMA: Which Should You Use?

Simple Moving Average (SMA)

The SMA gives equal weight to every price in the period. A 20-period SMA adds the last 20 closing prices and divides by 20. It produces a smooth line but reacts slowly to recent price changes.

Exponential Moving Average (EMA)

The EMA gives more weight to recent prices, making it more responsive to current price action. Most active traders prefer EMAs because they react faster to trend changes.

Rule of thumb: Use EMAs for shorter timeframes and active trading. Use SMAs for longer-term analysis (50-day and 200-day SMAs are institutional standards).

The Key Moving Average Periods

• 9 or 10 EMA — Ultra-short-term trend. Used for scalping and day trading entries.
• 20 EMA — Short-term trend. The most important MA for swing traders. Price above the 20 EMA = short-term bullish.
• 50 SMA/EMA — Medium-term trend. Institutional traders watch this level closely.
• 100 EMA — Intermediate trend filter.
• 200 SMA — The "big picture" trend. Price above the 200 SMA = long-term bull market. Below = bear market. This is the single most watched moving average on Wall Street.

Moving Average Crossover Strategies

Golden Cross and Death Cross

The golden cross occurs when the 50-day SMA crosses above the 200-day SMA — a major bullish signal. The death cross is the opposite. These signals are slow but historically reliable for identifying major trend changes.

Fast/Slow EMA Crossover

A faster EMA (e.g., 9) crossing above a slower EMA (e.g., 21) generates a buy signal. This is faster than the golden cross but produces more false signals. Filter with trend direction on a higher timeframe to reduce whipsaws.

Using Moving Averages as Dynamic Support/Resistance

In a strong uptrend, price often pulls back to the 20 EMA and bounces. This creates a simple but effective entry strategy: wait for a pullback to the 20 EMA, confirm with a bullish candlestick pattern, and enter long with a stop below the EMA.

The 50 and 200 SMAs act as stronger dynamic support/resistance levels. When price tests the 200 SMA for the first time in months, expect a significant reaction.

Multiple Moving Average Systems

Stack the 20, 50, and 200 EMAs on your chart. When all three are aligned (20 above 50 above 200) with price above all three, you have a strong trend. Trade only in the trend direction during these aligned periods for the highest probability setups.

Backtest Your MA Strategy

Moving average strategies are perfect for backtesting because the rules are objective: "Buy when the 20 EMA crosses above the 50 EMA" leaves no room for interpretation. Step through historical charts with backtestic's indicator overlay (EMA 20/50/100/200 built in) and see exactly how these signals performed.