Moving Averages

What is a moving average?

A moving average is the average of the closing prices of an asset over a specified period. As its name implies, it moves as it is constantly updated according to the latest closing price.

A moving average appears smoother than a price line by reducing the impact of short-term price fluctuations, thus giving a clearer picture of market trends. They can be used to identify trend direction or define potential support and resistance levels.

Types of moving averages

Two types of moving averages are the simple moving average (shown as MA in Webull App) and the exponential moving average (EMA).

A simple moving average is calculated giving equal weight to each price. For example, data point of a 5-day moving average is computed as the sum of the closing prices from the previous five trading days divided by five. However, an exponential moving average gives more weight to the latest prices. This makes EMA more sensitive to new price changes than the MA.

Length of moving averages

Moving averages are customizable. You can customize the length according to your needs. For example, a 5-day moving average is usually used to represent short-term momentum. 20-day and 60-day moving average are indicators of intermediate trend.

There is no best moving average length. You can explore different lengths so that it can signal future trends better.

What does a moving average imply?

1. Generally speaking, if the price is above the moving average, the asset is in an uptrend. If the price is below the moving average, the asset is in a downtrend.
2. Moving average can be identified as a support or a resistance level. When the price moves up and breaks through the moving average, the moving average line can be identified as a support level. When the price drops below the moving average, the moving average line becomes a resistance level. The breach points are possible price reversal signals.

How to identify trends with two or more moving averages?

• When a short-term moving average moves upwards and crosses the longer-term moving average, it is considered as a bullish signal. The crossover is called a bullish crossover. Investors may want to buy at this point.
• When a short-term moving average drops beneath the longer-term moving average, it is considered as a bearish signal. The crossover is called a bearish crossover. Investors may want to sell at this point.

Golden cross and death cross

Many technical analysts use 50-day moving average and 200-day moving average to identify long-term trends. The crossover signal identified is called either a golden cross or a death cross.

As we learned above, when the short-term (50-day) moving average moves upwards and crosses the long-term (200-day) moving average, this is a bullish signal. The crossover is called a golden cross. In contrast, when the 50-day average drops beneath the 200-day average, this is a bearish signal. The crossover is called a death cross.

Golden cross and death cross are believed to have great significance. A golden cross implies a long-term bull market while a death cross signals a long-term bear market.

Get a Heads-Up When Technical Signals Appear

Watching prices can be time-consuming. One simple way to watch a price efficiently is by setting a customized price alert. Check below to see how.

*Finally, please note that technical analysis is never 100% accurate. The interpretation of results is subjective. Please ensure the strategy being used is suitable for your risk tolerance.

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