Definition
The Simple Moving Average (SMA) sums the last N closing prices and divides by N. The Exponential Moving Average (EMA) weights recent prices more heavily, responding faster to changes. Common lookbacks are 20-day (short-term), 50-day (medium), and 200-day (long-term trend). Rules of thumb: price above the 200-day MA is 'uptrend', below is 'downtrend'. A 'golden cross' (50-day crossing above 200-day) is bullish; a 'death cross' (50-day crossing below 200-day) is bearish. Moving averages lag price by design — they smooth noise but miss inflection points. Their most reliable use is trend confirmation rather than entry timing.
SMA(N) = (P1 + P2 + ... + PN) / N
P = closing price for each period; EMA uses α = 2/(N+1) as weighting factor
Example
If SPY closes at 425 today with a 200-day SMA of 410, SPY is trading 3.7% above its long-term trend — classified as uptrend. A drop below the 200-day MA would trigger many trend-following systems to reduce exposure.
Frequently Asked Questions
What is the difference between SMA and EMA?
SMA weights all N prices equally. EMA weights recent prices more heavily. EMA reacts faster to new information but is more susceptible to whipsaws. Both are widely used.
What is the 200-day moving average significance?
It's the most-watched long-term trend indicator by both retail and institutional traders. Many algorithmic strategies use it as a binary trend filter — long above, defensive below.
Do moving averages actually predict future prices?
No. They describe past price behavior. Their value lies in identifying trend direction and providing dynamic support/resistance levels, not in forecasting.