Moving averages (SMA, EMA)
A moving average is the average of the closing prices of the last given number of candles, recalculated with every new candle. The simple average (SMA) gives every close equal weight; the exponential average (EMA) gives recent closes more weight. Both smooth price, and both lag behind it.
Which question does a moving average answer?
A moving average answers this question: where has price traded on average over the last N candles, and which way is that average moving? By smoothing the candle-to-candle swings, it shows the general direction of price as a calmer line.
Because the average is calculated from past closes, it always trails price. The longer the period, the flatter the line and the greater the lag. This is not a flaw but the cost of smoothing.
How it is calculated
- SMA (simple moving average) The sum of the last N closes is divided by N. When a new candle closes, the oldest close drops out and the new one comes in. Every close has equal weight.
- EMA (exponential moving average) Multiplier k = 2 ÷ (N + 1). EMA = this candle's close × k + previous EMA × (1 − k). For a 20-period EMA, k = 2 ÷ 21 ≈ 0.095.
- Starting value The SMA of the first N closes is usually used as the EMA's first value. That is why different platforms can show slightly different values at the start of a chart.
Commonly used periods
- 20: a short-term average. It follows the average of the last few swings.
- 50: a medium-term average. It shows the direction of larger swings.
- 200: a long-term average. It is often used to show the wider context, especially on the daily chart.
These periods are common choices with no special meaning. The same period covers different spans on different timeframes: 200 candles are about 8 days on the 1H chart and 200 days on the 1D chart.
How crossovers are read
Price crossing an average, or a short average crossing a long one, is widely watched. These describe a change of direction; they do not announce its outcome.
The short average rises above the long one
The average of recent closes has passed the average of a longer period. It can be read as a rise that has been under way for a while; because of the lag, part of the move is already behind.
The short average falls below the long one
Recent closes have started to stay below the longer-period average. It can be read as a decline that has been under way for a while.
Crossovers in a sideways market
When price moves back and forth in a range, the averages flatten and cross each other often. Most of these crossovers do not turn into a lasting direction.
What it shows, what it does not prove
What it shows
- Where price has traded on average over the last N candles
- The direction of that average, and whether its slope is steepening or flattening
- Whether price is above or below the average
What it does not prove
- That price will react when it touches the average
- That a move will continue after a crossover; a crossover summarises the past
- When a reversal will happen; every average trails price
The MarketLevelMap view
How it relates to zones
Moving averages are often read as a moving reference area: in an uptrend, pullbacks can be seen to pause around the average. But the average shifts with every candle; it is not a fixed support or resistance zone where price has reacted before.
So it is more realistic to think of an average as a band around the line rather than a thin line. When an average lines up with a support or resistance zone, two observations overlap. How price closes in that area says more than whether it touched the average.
Often confused with
For general information only. Not investment advice.Last updated: