Moving average (MA) is a simple technical analysis tool that smooths out price data by creating a constantly updated average price. That average can be taken over different periods of time – anything from 20 minutes, to three days, to 30 weeks or any other time period a trader chooses.
Moving average strategies are very popular and can be tailored to any time frame, suiting both long-term investors and short-term traders.
A common reason to create a moving average is to identify trend direction, as well as determining support and resistance levels.
When asset prices cross over their moving averages, it often generates a trading signal for technical traders. For example, a trader might sell when a price bounces off or crosses the MA from above – in order to close below the moving average.
Simple price crossovers
Price crossovers are one of the main moving average trading strategies. A simple price crossover happens when a price crosses above or below a moving average, signaling a potential change in trend.
Using two moving averages
Other trading techniques use two moving averages: one longer and one shorter. When the shorter-term MA crosses above the longer-term MA, it’s a buy signal, as it indicates that the trend is shifting up. This is known as a “golden cross.”
On the other hand, when the shorter-term MA crosses below the longer-term MA, it’s a sell signal, as it indicates that the trend is shifting down. This is known as a “dead cross” or “death cross.”