Moving Averages Explained — SMA vs EMA
Moving averages are the most used indicator in trading. Not because they predict the future — they do not. They smooth out price noise and show you the trend. And trading with the trend is the closest thing to an edge you can get as a retail trader.
SMA — Simple Moving Average
The SMA takes the average closing price over a set period. A 20-day SMA adds up the last 20 closing prices and divides by 20. Each day, the oldest value drops off and the newest one is added. Simple as that.
Example: 20-day SMA of the FTSE 100
Day 1-20 closing prices summed = 160,000
SMA = 160,000 / 20 = 8,000
On Day 21, drop Day 1, add Day 21
The line moves smoothly across the chart
Strength
The SMA is smooth and less reactive to sudden spikes. It gives equal weight to all prices in the period. This makes it good for identifying the overall trend without getting whipsawed by short-term noise.
EMA — Exponential Moving Average
The EMA also averages price, but gives more weight to recent prices. This makes it react faster to new price action. A 20-day EMA will turn sooner than a 20-day SMA when the trend changes.
- •Advantage — faster signals, gets you into trends earlier and out of losing trades sooner.
- •Disadvantage — more false signals because it reacts to noise as well as genuine trend changes.
Which Should You Use?
Honestly? It does not matter as much as people think. The difference between a 20 SMA and 20 EMA is marginal. Pick one and stick with it. Consistency matters more than the exact indicator. Most professional traders use EMAs for shorter periods (9, 21) and SMAs for longer periods (50, 200).
The Three Moving Averages That Matter
- •20 EMA — the short-term trend. If price is above the 20 EMA, the short-term trend is up. Day traders and swing traders live and die by this line. It acts as dynamic support in an uptrend.
- •50 SMA — the medium-term trend. Institutional traders watch this closely. Hedge funds rebalance around the 50-day. Pullbacks to the 50 SMA in a strong trend are often buying opportunities.
- •200 SMA — the long-term trend. The big one. If price is above the 200 SMA, the market is in a bull trend. Below it? Bear trend. Financial media talks about the 200 SMA constantly because it genuinely matters.
Golden Cross and Death Cross
These sound dramatic because they are. They are the two most watched moving average signals:
- •Golden cross — the 50 SMA crosses ABOVE the 200 SMA. Bullish signal. The medium-term trend has turned positive relative to the long-term trend. Historically associated with the start of major bull runs.
- •Death cross — the 50 SMA crosses BELOW the 200 SMA. Bearish signal. Often (but not always) marks the start of a prolonged downtrend.
Practical Example
In early 2023, the FTSE 250 printed a golden cross on the daily chart. Traders who bought the cross and held for six months captured a 15% rally. The signal was late (moving averages always are), but it confirmed the trend change and gave traders confidence to stay long.
Using Moving Averages as Dynamic Support/Resistance
In a strong uptrend, price often pulls back to the 20 EMA and bounces. This is one of the cleanest trade setups in technical analysis:
- 1.Confirm the trend is up (price above 50 and 200 SMA)
- 2.Wait for price to pull back to the 20 EMA
- 3.Look for a bullish candlestick pattern at the 20 EMA (hammer, engulfing)
- 4.Enter long with a stop below the 20 EMA
- 5.Target the previous high or a measured move
When This Fails
If price slices through the 20 EMA and does not bounce, the short-term trend is changing. Do not fight it. Wait for price to reclaim the 20 EMA before looking for longs again. The market does not care about your bias.
Risk Warning
Moving averages are lagging indicators. They confirm trends, they do not predict them. Trading financial instruments carries a high level of risk. This content is for educational purposes only and does not constitute financial advice.