Simple moving average (SMA) definition
Simple moving average (SMA)
Simple moving averages (SMAs) allow you to identify if a market is trending up, down or ranging sideways and are utilized in many technical indicators. SMAs calculate a market’s average price over a given time by adding the closing prices for all periods in the timeframe and dividing the total by the number of periods tallied.
For example, the five-hour SMA taken from an hourly chart would include the closing price of the last five hours divided by five. Typically, the longer the SMA period used, the more it will lag behind current price action. A 30-period SMA will see less movement than a 5 period SMA. Many indicators use multiple moving averages of different lengths to identify trends.
Death cross and golden cross patterns
The death cross and golden cross are two of many patterns used in technical analysis involving SMAs. The death cross indicates the start of a long-term bear market, and the golden cross indicates the start of a long-term bull market. Both patterns are considered solid confirmations of long-term trends by the occurrence of a short-term SMA crossing a long-term SMA.
Because SMAs follow price action, these two patterns are more often confirmations of trend changes than indicates of how price momentum will change. Regardless, the death cross and golden cross are key patterns because they signal that the new direction the market is headed in, be it bear or bull, is likely long-term.