Moving Average

The Simple Moving Average (SMA) is one of the most widely used technical analysis tools. It is calculated by adding the closing prices over a set number of periods and dividing that sum by the number of periods. For example, a 20-day moving average adds the closing prices of the last 20 days and divides the total by 20; this line moves as each new candle is added and the oldest value is dropped.

The moving average is used to identify the overall trend: when the price moves above the moving average, it is considered an indicator of an uptrend, and the opposite is true when it moves below it. It is also used as a dynamic support or resistance level from which the price can rebound, as well as in moving average crossover strategies, where buy or sell signals are generated when a short-term moving average crosses a long-term moving average.

Among the most popular periods used are 20, 50, 100, and 200, with the 200-day moving average widely viewed across financial markets as a key indicator of the long-term trend. The crossover of the 50-day and 200-day moving averages is known as the Golden Cross or the Death Cross, depending on whether the crossover is bullish or bearish, respectively.

One drawback of the moving average is that it is a lagging indicator based on past data, meaning it may be late in providing entry or exit signals, and it can generate frequent false signals in sideways, non-trending markets. Therefore, it is best combined with other indicators, such as the RSI or MACD, to confirm signals.