Moving average
Key points
- The most common are the 20, 50, 100 and 200-day averages; shorter ones react quickly, longer ones slowly.
- Price above the 200-day average is read as a long-term uptrend, below it as a downtrend.
- averages are lagging indicators; by the time they signal, much of the move may be over.
Formula / calculation
Simple moving average (SMA) = Sum of the last N closes / N. The exponential moving average (EMA) weights recent prices more: EMA = Price × k + Previous EMA × (1 − k), with k = 2 / (N + 1).
Interpretation
Price above the 200-day average is read as a long-term uptrend, below it as a downtrend. A short average crossing above a long one is called a golden cross, crossing below a death cross.
Pitfalls
averages are lagging indicators; by the time they signal, much of the move may be over. In sideways markets they generate frequent false signals. Averages break on data not adjusted for bonus issues and dividends.
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Frequently asked questions
What is Moving average?
A moving average recalculates the average of the last N closing prices every day, filtering price noise and revealing the trend.
How is Moving average calculated?
Simple moving average (SMA) = Sum of the last N closes / N. The exponential moving average (EMA) weights recent prices more: EMA = Price × k + Previous EMA × (1 − k), with k = 2 / (N + 1).
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