Chart School / Thinking About Strategies & Risk

Moving averages and crossovers

Lesson 7 of 14 · about 1 min read, plus practice · Glossary

A simple moving average takes the arithmetic mean of a chosen number of past prices, usually closes. A shorter window reacts faster; a longer window smooths more history. Crossovers describe one average passing another. They lag the underlying observations and can reverse repeatedly in sideways markets. Choose the window and interval explicitly. An average is not a fair-value estimate, and it is not an independently verified forecast. Comparing only the successful crossover examples creates selection bias.

Worked fictional example

Fictional closes of $10, $12 and $14 have a three-period simple average of $12. Adding $10 and dropping the first $10 leaves the next three-period average at $12, despite a lower latest close.

What could invalidate this interpretation?

Repeated crosses in a narrow range weaken a hypothesis that a crossover alone identifies a sustained trend.

A counterexample

A fast average can cross above a slow one shortly before a sharp price decline. No continuation is guaranteed.

Check your understanding

Further learning

Original FinanceFD explanations and drawings. For additional context, see Fidelity’s overview of technical analysis, Fidelity’s RSI guide and Investor.gov’s investing introduction.