Simple and exponential
A simple moving average treats all N candles equally. An exponential one weights recent candles more heavily, so it turns sooner and whipsaws more. Neither is better; a faster line reacts earlier and is wrong more often, a slower line is right more often and later.
Every moving average is late
It is an average of the past, so it cannot lead the price. This is not a flaw to be tuned out with a better setting — it is what the calculation is. A moving average tells you what has been happening, which is genuinely useful and is not the same as what will happen.
What a crossover is
When a faster average crosses a slower one, the recent average has moved past the longer one. That is a statement about the last few candles relative to the last many. It is a readable summary of a change in pace, and it is late by construction.
Where they are used honestly
As a trend filter rather than a signal. "Only take longs while price is above the 200" removes half the chart and half the trades, and what it removes is the half fighting the larger move. Used that way an average does something a price chart alone does not.
The settings do not matter as much as you think
The 20, the 50 and the 200 are conventions, not discoveries. Their strength is that a lot of people watch them, which makes them mildly self-fulfilling. Searching for a magic number by testing hundreds of them finds the one that fit the past best, which is the definition of overfitting.
In short
| SMA | Every candle weighted equally |
|---|---|
| EMA | Recent candles weighted more |
| Common lengths | 20, 50, 200 |
| Always | Behind price, by construction |
Common questions
Which is better, SMA or EMA?
Neither. EMA turns earlier and gives more false turns; SMA is steadier and later. Choose one for the timeframe you trade and stop switching.
What does the 200-day moving average mean?
It is the average close of the last two hundred days. It is watched widely enough that reactions around it are common, which is a fact about crowds rather than about value.
Can I trade on crossovers alone?
You can, and it will lose money in ranging markets, because a range crosses back and forth continuously. Crossovers work best where the thing they measure exists: a market that trends.
Trading forex and CFDs on margin carries a high level of risk. Most retail accounts lose money. Nothing on this page is financial advice or a recommendation to trade.