Moving Average
Quick Answer
A calculation that smooths price data by creating a constantly updated average price over a specific period.
Types of Moving Averages
Simple Moving Average (SMA) Calculates the arithmetic mean of prices over a specified period. Each price point is weighted equally.
Exponential Moving Average (EMA) Gives more weight to recent prices, making it more responsive to new information. Better for short-term trading.
Weighted Moving Average (WMA) Assigns different weights to each price point, typically giving more importance to recent prices.
Popular Periods
Short-term (10-20 periods) Used for identifying immediate trend direction and short-term trading signals.
Medium-term (50 periods) The 50-day MA is widely used to gauge intermediate trends. Breaking above or below often signals significant momentum shifts.
Long-term (200 periods) The 200-day MA is considered the dividing line between bull and bear markets. Institutional investors pay close attention to this level.
Trading Signals
Golden Cross When a shorter MA crosses above a longer MA (e.g., 50-day above 200-day). This is a bullish signal.
Death Cross When a shorter MA crosses below a longer MA. This is a bearish signal.
Price Crossovers When price crosses above or below a moving average, it can signal trend changes.
Real-World Example
The 200-day moving average is widely watched. When the S&P 500 trades above its 200-day MA, it's generally considered bullish.