How Moving Averages Work

7 min read

A moving average smooths out price data over a chosen period, making the underlying trend easier to see through the day-to-day noise of individual candles.

Because of this smoothing effect, moving averages are often one of the very first indicators added to a chart, and remain a building block for many more complex tools, including MACD.

Simple vs. exponential

A simple moving average gives equal weight to every price in the chosen period, while an exponential moving average weights recent prices more heavily, making it react faster to new information. Neither is universally 'better' - the choice depends on whether a trader prioritizes smoothness or responsiveness.

This trade-off between smoothness and responsiveness comes up throughout technical analysis, and understanding it here makes it easier to understand similar choices in other indicators.

• Simple moving average: Weights every price in the period equally.
• Exponential moving average: Weights recent prices more heavily, reacting faster to new data.
• Smoothness vs. responsiveness: The core trade-off between the two types of moving average.

Reading the slope and price relative to the average

A rising average generally reflects an uptrend and a falling one a downtrend, while price trading above or below the average is often read as confirming that same direction.

Price crossing the average is sometimes treated as an early signal that the trend may be shifting, though like most single signals, it's more reliable alongside other confirmation.

• Slope: The direction the average itself is moving - rising, falling or flat.
• Price vs. average: Trading above or below the average is often read as confirming trend direction.
• Price crossing the average: Sometimes treated as an early sign the trend may be shifting.

Moving average crossovers

A common technique compares a shorter-period average to a longer-period one - when the shorter average crosses above the longer one, it's often read as a bullish signal, and the reverse as bearish.

Like any single indicator, crossovers tend to be used alongside other confirmation rather than in isolation, since they share the same lag limitation as the moving averages they're built from.

• Bullish crossover: A shorter-period average crossing above a longer-period one.
• Bearish crossover: A shorter-period average crossing below a longer-period one.
• Lag limitation: Crossovers confirm a move after it starts rather than predicting it.