Moving Averages (SMA, EMA, WMA)
Moving averages are the most widely used technical indicators in trading. They smooth out price data to create a flowing line that helps identify the direction and strength of a trend. Understanding moving averages is fundamental to technical analysis.
Simple Moving Average (SMA)
The SMA calculates the average closing price over a specified number of periods. A 20-period SMA adds up the last 20 closing prices and divides by 20. It treats every period equally, giving a smooth representation of the average price.
Exponential Moving Average (EMA)
The EMA gives more weight to recent prices, making it more responsive to new information. This means it reacts faster to price changes than the SMA. Day traders and swing traders often prefer EMAs because they catch trend changes earlier.
Weighted Moving Average (WMA)
The WMA assigns linearly increasing weights to each period, with the most recent period getting the highest weight. It falls between SMA and EMA in terms of responsiveness.
Key Moving Average Periods
Commonly used periods:
- 10 or 20 period — short-term trend (used for entries and exits)
- 50 period — medium-term trend (institutional benchmark)
- 100 period — intermediate trend
- 200 period — long-term trend (the most watched MA in the world)
Moving Average Strategies
Popular strategies:
- Golden Cross: 50 MA crosses ABOVE 200 MA → bullish signal
- Death Cross: 50 MA crosses BELOW 200 MA → bearish signal
- MA as dynamic support/resistance: price bouncing off the 20 or 50 MA
- MA ribbon: multiple MAs stacked (10, 20, 50, 100, 200) showing trend strength
Pro Tip
The 200-day moving average on the daily chart is arguably the single most important indicator in all of trading. Institutional traders, hedge funds, and algorithms all watch this level. Price above the 200 MA = bullish bias, below = bearish bias.
Key Takeaways
- SMA treats all periods equally; EMA weights recent prices more heavily
- Common periods: 20 (short), 50 (medium), 200 (long-term)
- The 200-day MA is the most widely watched indicator globally
- Golden Cross (50>200) is bullish; Death Cross (50<200) is bearish
- MAs act as dynamic support and resistance levels