What are Moving Averages?
Learn how moving averages smooth out price noise and reveal the true trend direction.
Quick Answer
A Moving Average (MA) is a line that shows the average price over a specific time period (like 20 days or 50 days). It smooths out daily price zigzags to reveal the trend. When price is above the MA = uptrend. Below = downtrend. Think of it like the "average mood" of a stock—it filters out the daily noise and shows the real direction.
Two Types: SMA vs EMA
SMA (Simple Moving Average)
The basic version. Adds up prices and divides by the number of days.
Example: 5-day SMA
Prices: $100, $102, $101, $103, $104
SMA = (100+102+101+103+104) ÷ 5 = $102
Pros: Smooth, reliable, less whipsaws
Cons: Slower to react to price changes
Best for: Long-term trends, major support/resistance levels
EMA (Exponential Moving Average)
The faster version. Gives more weight to recent prices.
Same 5 prices, but recent days count MORE
If today's price jumps to $110...
EMA reacts faster than SMA
Pros: Reacts quickly to new price moves
Cons: More false signals, noisier
Best for: Day trading, quick entries/exits
Which should you use? SMA for position trading (weeks/months), EMA for day/swing trading (hours/days). When in doubt, start with SMA—it's simpler and more reliable.
The Most Important Moving Averages
20-Day MA (Short-term Trend)
Shows the trend over the past month. Day traders and swing traders watch this closely. When price is above 20-day MA = short-term uptrend.
50-Day MA (Medium-term Trend)
Shows the trend over ~2.5 months. Swing traders love this one. Acts as support in uptrends, resistance in downtrends. Very reliable.
200-Day MA (Long-term Trend)
The king of moving averages. Shows the trend over ~1 year. When a stock is above its 200-day MA = bull market. Below = bear market. Institutions and algorithms watch this religiously.
Real Trading Examples
The Golden Cross (Super Bullish)
Apple (AAPL) - March 2020 (after COVID crash)
Stock recovering from $60 low...
50-day MA crosses ABOVE 200-day MA
= "Golden Cross" (famous bullish signal)
↓
Signal confirmed at $80
↓
Stock rallies to $140 over next 6 months
75% gain from catching the major trend reversal
The Death Cross (Super Bearish)
Facebook/Meta (META) - November 2021
Stock at all-time high $380...
50-day MA crosses BELOW 200-day MA
= "Death Cross" (famous bearish signal)
↓
Signal confirmed at $330
↓
Stock crashes to $90 over next 6 months
73% drop—Death Cross saved you from disaster
MA as Support (Buy the Dip)
Microsoft (MSFT) - Strong uptrend in 2023
Stock trending up, riding the 50-day MA
Price dips to touch 50-day MA at $330
↓
Buy at 50-day MA support ($330)
↓
Stock bounces back to $365 in 2 weeks
10% gain by buying the dip at a key MA
How to Trade with Moving Averages
1. Trend Identification (Easiest)
Price above MA = Uptrend → Only buy
Price below MA = Downtrend → Avoid or short
Use 200-day MA for this. It's the simplest trend filter in the world.
2. Buy Dips at Moving Averages
In an uptrend, wait for price to pull back to the MA
Buy when price touches 20-day or 50-day MA
Like buying support—MA acts as a floor in uptrends. Gets you better entries than chasing.
3. Golden Cross / Death Cross
50-day crosses above 200-day = Buy (Golden Cross)
50-day crosses below 200-day = Sell (Death Cross)
Slow but powerful. These signals mark major trend shifts. When they happen, pay attention.
4. Multiple MA Alignment
If 20-day > 50-day > 200-day (all rising) = STRONG uptrend
If 20-day < 50-day < 200-day (all falling) = STRONG downtrend
When all three align, it's a steamroller trend. These are the best trades—ride them hard.
Moving Average Mistakes to Avoid
Using MAs in Choppy Sideways Markets
MAs work great in trends, horrible in ranges. In choppy markets, you'll get whipsawed constantly (price crosses above, then below, then above again = losses). Check if there's a trend first!
Using Only One Moving Average
A single MA doesn't give context. Use at least two (like 50-day and 200-day). This shows both medium-term and long-term trends, giving you the full picture.
Expecting MAs to Predict the Future
MAs are lagging indicators—they show what HAS happened, not what WILL happen. They confirm trends, they don't predict them. Accept the lag and use them for confirmation.
Buying Every Time Price Touches an MA
MAs aren't magic. Sometimes price slices right through them. Always confirm with volume, RSI, or support levels before entering trades.
Which Moving Averages Should You Use?
If you're a beginner / long-term investor:
Use the 50-day SMA and 200-day SMA. That's it. When price is above both = buy. When it crosses below = sell. Simple and effective.
If you're a day trader:
Use the 9-EMA and 21-EMA on 5-min or 15-min charts. Fast, responsive, catches intraday momentum shifts.
If you're a swing trader (2-5 days):
Use the 20-day SMA and 50-day SMA. Buy dips to the 20-day MA, exit if it breaks below 50-day MA.
If you want the "pro setup":
Watch the 20, 50, and 200-day SMAs together. When all three align in the same direction, you've got a powerful trend—those are the trades that make big money.
Common Questions
What's better: SMA or EMA?
SMA for long-term trends and reliability. EMA for short-term trading and faster signals. Most pros use SMA for 50-day and 200-day, EMA for shorter periods like 9-day or 12-day.
How accurate is the Golden Cross?
About 60-70% of Golden Crosses lead to sustained rallies. It's not perfect, but it catches major bull runs. The S&P 500's Golden Cross in 2009 kicked off an 11-year bull market.
Can I use moving averages for crypto?
Yes! Bitcoin respects the 200-day MA religiously. However, crypto is more volatile, so expect more whipsaws. Use wider stops and shorter MAs (like 20/50 instead of 50/200).
Do moving averages work on all stocks?
They work best on liquid, trending stocks (Apple, Tesla, Microsoft). Less useful on illiquid penny stocks or stable dividend stocks that barely move. MAs need trends to work.
Key Takeaways
- •Moving averages smooth out price noise to reveal the true trend direction
- •SMA = smooth and reliable, EMA = fast and responsive
- •Most important: 20-day (short), 50-day (medium), 200-day (long)
- •Golden Cross (50 above 200) = bullish, Death Cross = bearish
- •MAs work great in trends, horrible in choppy sideways markets