Moving Average

A line on a price chart calculated by averaging a security's closing prices over a defined number of periods, used to smooth price data and identify trends.

The simple moving average (SMA) adds the closing prices of the last N periods and divides by N. Common lookback periods are 20 days (roughly one month), 50 days (about two months), and 200 days (about one year). Longer averages are slower-moving and reflect the longer-term trend; shorter averages are more sensitive to recent price changes and better for identifying near-term direction.

Moving averages serve multiple functions. As trend filters: price above the 200-day MA is generally considered bullish; price below is bearish. As dynamic support and resistance: the 50-day and 200-day MAs often act as price support during pullbacks in uptrends or resistance during rallies in downtrends. As crossover signals: when a shorter MA crosses above a longer one (a "golden cross"), it is a bullish signal; the reverse (a "death cross") is bearish.

The main limitation of moving averages is that they are lagging indicators — they react to price changes rather than predicting them. By the time a meaningful MA crossover occurs, a significant portion of the move has already happened. Traders balance this lag by using shorter-period MAs for more responsive signals, accepting the tradeoff of more false signals. Exponential moving averages (EMA) address this partially by weighting recent prices more heavily.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.