Moving Average
A moving average is the average price of a security over a set number of recent periods, recalculated each period to create a smoothed line on a chart.
Daily stock prices are noisy. A moving average filters out short-term fluctuations, making it easier to see the underlying trend. It is called moving because each day the newest price is added and the oldest one dropped.
The two main types are the simple moving average (SMA), which weights all prices equally, and the exponential moving average (EMA), which gives more weight to recent prices and reacts faster. Common lengths are the 20-day for short-term trends, the 50-day for intermediate trends and the 200-day for long-term trends.
Traders use moving averages in several ways: price above a rising average is often read as an uptrend; the average can act as dynamic support or resistance; and crossovers between a short and a long average, such as the golden cross, are used as signals.
Moving averages are lagging indicators: they confirm trends after they start and can generate false signals in sideways markets. Example: a 5-day moving average of closing prices $10, $11, $12, $11 and $13 is $11.40.