A moving average smooths price data by averaging it over a set period, helping reveal the underlying trend by filtering out short-term noise.
A moving average is one of the most common technical analysis tools. It averages an asset price over a chosen number of periods and updates as new data arrives, producing a smooth line that follows the trend.
The two main types are the simple moving average (SMA), which weights all periods equally, and the exponential moving average (EMA), which gives more weight to recent prices and reacts faster.
Common periods include the 50-day and 200-day averages. When a shorter average crosses above a longer one, traders call it a golden cross and read it as bullish; the opposite, a death cross, is read as bearish.
Moving averages are useful for identifying trend direction and potential support or resistance levels, but they lag price because they look backward.
A simple 5-day moving average of closing prices $10, $12, $11, $13 and $14 is their sum, $60, divided by 5, giving $12. As tomorrow's close is added and the oldest dropped, the average updates, producing a smooth line that filters out daily noise.
A simple moving average (SMA) gives every period in the window equal weight. An exponential moving average (EMA) weights recent prices more heavily, so it reacts faster to new moves but can also produce more false signals.
A golden cross occurs when a shorter moving average, such as the 50-day, crosses above a longer one, such as the 200-day. Traders often read it as a bullish signal, while the opposite move is called a death cross.
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