What is a Moving Average (MA)?

Moving averages smooth out price action and make it easier to spot market trends. As they’re based on previous price data, they lack predictive qualities. As such, moving averages are considered lagging indicators.

Moving averages have various types — the two most common one is the simple moving average (SMA or MA) and the exponential moving average (EMA). What’s the difference between them?

The simple moving average is calculated by taking price data from the previous n periods and producing an average. For example, the 10-day SMA takes the average price of the last 10 days and plots the results on a graph.

The exponential moving average is a bit trickier. It uses a different formula that puts a bigger emphasis on more recent price data. As a result, the EMA reacts more quickly to recent events in price action, while the SMA may take more time to catch up.

As we’ve mentioned, moving averages are lagging indicators. The longer the period they plot, the greater the lag. As such, a 200-day moving average will react slower to unfolding price action than a 100-day moving average.

Moving averages can help you easily identify market trends.

What is the Moving Average Convergence Divergence (MACD)?

The MACD is an oscillator that uses two moving averages to show the momentum of a market. As it tracks price action that has already occurred, it’s a lagging indicator.

The MACD is made up of two lines — the MACD line and the signal line. How do you calculate them? Well, you get the MACD line by subtracting the 26 EMA from the 12 EMA. Simple enough. Then, you plot this over the MACD line’s 9 EMA — the signal line. In addition, many charting tools will also show a histogram that illustrates the distance between the MACD line and the signal line.

Traders may use the MACD by observing the relationship between the MACD line and the signal line. A crossover between the two lines is usually a notable event when it comes to the MACD. If the MACD line crosses above the signal line, that may be interpreted as a bullish signal.

In contrast, if the MACD line crosses below the signal, that may be interpreted as a bearish signal. The MACD is one of the most popular technical indicators out there to measure market momentum.