Glossary
Moving average
The average price over the last N periods, recalculated each period, which smooths noise and shows the trend.
A moving average is the average of a security's price over a fixed number of recent periods, recalculated as each new period arrives so that it "moves" along the chart. It smooths out day-to-day noise and turns a jagged price series into a line that shows the underlying direction. Moving averages are the foundation of many other indicators, including MACD and Bollinger Bands, and the 50-day and 200-day averages are among the most widely watched lines in markets.
How it is calculated
The simple moving average (SMA) gives every period equal weight. The exponential moving average (EMA) gives more weight to recent prices, so it reacts faster. Weighted and adaptive versions exist too.
How traders use them
- Trend direction: price above a rising average suggests an uptrend; below a falling one, a downtrend.
- Support and resistance: pullbacks often pause near widely watched averages.
- Crossovers: a short average crossing above a long one, such as the 50-day over the 200-day, is called a golden cross; the reverse is a death cross.
The trade-off is between smoothness and speed. Longer averages filter more noise but react later, and in a sideways market prices whip back and forth across any average, producing a run of false signals.