Moving Average

A moving average is the average price of a stock calculated over a specific number of past trading days. As new days are added, the oldest day is dropped, creating a "rolling" average that smooths out daily price noise.

Formula

Simple Moving Average (SMA) = Sum of Prices Over N Days ÷ N

For a 50-day moving average, add up the closing prices for the last 50 trading days and divide by 50.

Example

The S&P 500 ETF (SPY) has a 200-day moving average that traders watch closely. If SPY is at $450 and its 200-day average is $430, the stock is trading above its long-term trend. If it drops below $430, traders may interpret this as a trend reversal signal.

How to Interpret It

• Price above the moving average: Generally a bullish sign, suggesting the stock is in an uptrend.
• Price below the moving average: Generally a bearish sign, suggesting the stock is in a downtrend.
• Crossing moving averages: When a shorter-term average (50-day) crosses above a longer-term average (200-day), traders call this a "golden cross"—often seen as a buy signal.
• Multiple moving averages: Traders often plot 50-day, 100-day, and 200-day averages together to see layered support and resistance.

Limitations

• Moving averages lag the current price—they smooth out trends but don't predict them.
• They work well in trending markets but produce false signals in choppy, sideways markets.
• The "perfect" time window (20, 50, 200 days) varies by stock and trader preference.
• A sharp, sudden drop can break through moving averages before the average reacts.

Related Terms

• SMA — Simple Moving Average, the most basic type
• EMA — Exponential Moving Average, which weights recent prices more heavily
• Bollinger Bands — moving averages with volatility bands
• Technical Analysis — using charts and patterns to predict price movement