Trading glossary
A moving average smooths price data into a single evolving line to show the average price over a chosen period. Learn simple vs exponential, neutrally.
A moving average takes the average price of a security over a defined number of periods and recalculates it as each new period closes. Plotting these values creates a smoothed line that filters out short-term noise and makes the general direction of price easier to see. Common lengths include 20, 50, and 200 periods.
A simple moving average weights every period in the window equally. An exponential moving average gives more weight to recent prices, so it reacts faster to new movement. Neither is inherently better; the choice depends on whether a trader wants a smoother line or a more responsive one for the timeframe they study.
Traders use moving averages to describe trend direction, as reference levels, or to compare a shorter average against a longer one. Because the calculation relies on past prices, a moving average always lags current price and can be slow to reflect sudden changes. It describes history rather than forecasting it.
A simple moving average (SMA) weights all periods equally, producing a smoother, slower line. An exponential moving average (EMA) emphasizes recent prices, so it responds faster to new movement but can be noisier.
There is no universally best period. Shorter averages such as 20 track price closely, while longer ones such as 200 show broader direction. The choice depends on your timeframe and what you are trying to observe.