Moving Averages: SMA, EMA, Crossover Signals, and Trend Context
Summary
This guide explains simple and exponential moving averages as ways to smooth price series. An SMA averages prices over a selected window, while an EMA updates recursively and gives more weight to recent prices. It illustrates both calculations with a short price series and presents example values for a five-period calculation. The guide also describes how traders commonly read short- and long-window averages, including crossover signals, average slopes, and price relative to an average.
The examples use a fictional stock and are instructional rather than evidence of profitability. Crossovers are presented as possible buy or sell signals, and the text recommends combining moving averages with other forms of analysis and indicators. It does not quantify transaction costs, false signals, or performance across market regimes, so the described interpretations should not be treated as validated rules. The worked EMA initializes its recursive calculation from the first observed price, a choice that can affect early values.
Key ideas
- An SMA is the arithmetic mean of prices in a chosen window.
- An EMA recursively updates its value and responds more strongly to recent prices.
- A short average crossing above or below a longer average is commonly interpreted as a possible trend signal.
- Average slope and price relative to an average offer additional ways to describe trend context.
- The examples illustrate calculations and interpretations but do not establish trading performance.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.