Moving Averages (SMA & EMA)
The trend, smoothed: the most-watched lines in finance, and the backbone of countless systems.
Core IndicatorsIntermediate 7 min read· Lesson 6 of 13 in Technical Analysis
Explanation & formula
SMA(n) = mean of the last n closes — equal-weighted, smooth, laggy. EMA(n) weights recent prices more (multiplier 2/(n+1)), reacting faster at the cost of more whipsaw. Common settings: 20 (swing trend), 50 (intermediate), 200 (the institutional dividing line between bull and bear).
Interpretation
Price above a rising MA = uptrend context; the MA itself often acts as dynamic support (see the Pullback strategy). Crossovers (fast above slow) define regimes: the 50/200 golden/death cross is the most famous — few, late, but historically meaningful signals.
Bullish / bearish signals
Bullish: price reclaiming a falling 200MA; 20>50>200 stacked and rising; successful bounces off the 20/50. Bearish: the mirror image, plus a flattening 200MA after a long advance.
Common mistakes
Using MAs as precision entries in CHOPPY ranges — they whipsaw mercilessly there (check ADX or CHOPPINESS first). And optimizing the period until backtests look perfect: 19 vs 21 days is noise-fitting.