How to Use Moving Averages: A Beginner’s Guide
- A moving average calculates the average price over a set number of periods, dropping the oldest data point and adding the newest one as time passes
- The Simple Moving Average weighs every period in its lookback equally; the Exponential Moving Average gives more weight to recent prices, making it react faster to changing conditions
- Common settings include the 20, 50, and 200-period averages, with shorter periods used for short-term trading and longer periods for identifying the bigger-picture trend
- The "Golden Cross," when a 50-period average crosses above the 200-period average, is a widely followed long-term bullish signal; the "Death Cross" is the bearish equivalent
- Moving averages are lagging indicators by nature; they confirm what has already happened rather than predicting what's next, and will never catch the exact top or bottom of a move
- In sideways, range-bound markets, moving averages generate frequent false crossover signals, since price repeatedly crosses back and forth across the average without a genuine trend forming
- Many traders combine a fast and a slow moving average together, using the fast one for entry timing and the slow one for overall trend bias, rather than relying on a single average alone
A moving average smooths out raw price data into a single line, making it far easier to see whether an asset is generally trending up, down, or sideways without getting distracted by every small fluctuation. The two most common types, the Simple Moving Average, SMA, and Exponential Moving Average, EMA, differ in how much weight they give to recent prices versus older ones. This guide explains how each works, the most widely used settings, and the crossover signals built from combining two averages together.
What a Moving Average Actually Does
A moving average is the average price of an asset over a specific number of past periods, recalculated continuously as new price data comes in. A 20-day moving average, for example, averages the last 20 closing prices; tomorrow, it drops the oldest of those 20 and adds the newest one. The result is a single smooth line that strips out the day-to-day noise of raw price action, making the underlying trend direction much easier to see.
SMA vs. EMA: The Core Difference
Simple Moving Average (SMA) gives every period in its calculation window equal weight. A 200-day SMA treats a price from 200 days ago exactly the same as yesterday’s price. This makes the SMA smoother and slower to react, useful for filtering noise but with more inherent lag.
Exponential Moving Average (EMA) applies more weight to recent prices and progressively less to older ones, making it react faster to changing conditions. This responsiveness is why active traders often prefer the EMA for entries and exits, while still being more prone to reacting to short-term noise than the smoother SMA.
| Type | Weighting | Best For |
|---|---|---|
| SMA | Equal weight to every period | Long-term trend identification, smoother signal |
| EMA | More weight to recent prices | Active trading, faster entry/exit signals |
Neither type is superior in all conditions; many traders use both together, an EMA for faster signals and an SMA for a steadier overall bias.
Common Settings and What They’re Used For
The most widely referenced moving average periods are 20, 50, and 200, though the right choice depends on your specific timeframe and trading style.
Short-term, 9-20 period: commonly used on intraday charts by active and momentum traders for fast entry and exit signals.
Medium-term, 50 period: used to gauge the intermediate trend, often as a pullback level within a larger trend.
Long-term, 200 period: used to identify the broad, long-term trend, especially on daily charts, and widely watched at the institutional level.
Crossover Signals: Golden Cross and Death Cross
Combining two moving averages of different lengths creates a crossover signal. When a shorter-term average crosses above a longer-term one, this is read as a bullish signal; when it crosses below, it’s read as bearish.
The most famous example is the Golden Cross, when the 50-period average crosses above the 200-period average, widely followed as a long-term bullish signal among institutional investors and technical analysts. The reverse, the 50-period crossing below the 200-period, is the Death Cross, read as a long-term bearish signal.
Shorter-term traders use the same logic on faster combinations, such as a 9 and 20-period EMA crossover on an intraday chart, though crossovers on any timeframe work better after a clean period of consolidation than in the middle of an already-stretched move.
The Real Limitations to Keep in Mind
Moving averages are lagging indicators: they’re built entirely from past prices, so they confirm a trend after it has already started rather than predicting it in advance. They will never catch the exact top or bottom of a move.
In sideways, range-bound markets, moving averages generate frequent false signals, since price crosses back and forth across the average repeatedly without a genuine trend ever forming. This is why moving averages work best specifically in trending environments and tend to underperform during choppy, directionless conditions.
A Simple Way to Combine Them
A commonly recommended starting framework: use a fast moving average for entry timing and a slower one for overall trend bias. For example, only take long entries when price is above a rising 50-period average, the bias, and use a 20-period EMA pullback or a 9/20 crossover for the specific entry trigger, the timing. Requiring agreement across at least two timeframes, the higher one for bias, the lower one for entry, filters out a meaningful number of false signals compared with relying on a single average alone.
Our Take
Moving averages remain one of the most widely used tools in technical analysis precisely because they’re simple, well understood, and effective at one specific job: smoothing noisy price data into a clear trend signal. Choosing between SMA and EMA, and selecting the right period for your timeframe, depends on whether you prioritize smoothness or responsiveness, but either way, moving averages work best in trending conditions and should be combined with other context, price action, volume, or a second average, rather than relied upon entirely alone.
This article is for informational and educational purposes only and does not constitute financial advice. Trading carries risk of loss. Always do your own research before trading with real capital.
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