Explore how moving averages smooth price data and how crossovers generate trading signals.
Moving averages are lines that average prices over a set number of periods. A simple moving average (SMA) gives equal weight to all data points, whereas an exponential moving average (EMA) assigns more weight to recent prices, making it more responsive to new information【781855223865922†L404-L439】. Moving averages smooth out short‑term fluctuations and help traders focus on the underlying trend.
When a short‑term moving average crosses above a long‑term moving average, it is called a golden cross and suggests the start of a bullish trend. Conversely, when the short‑term average crosses below the long‑term average, it forms a death cross and can signal a bearish turn【781855223865922†L398-L402】.
Crossovers can be useful as buy or sell signals but they are lagging indicators. Rapid price moves can cause late or false signals, so it’s wise to confirm with other data such as volume or trendlines【781855223865922†L489-L499】.