A moving average (MA) is calculated by adding the closing prices of the last N candles and dividing the sum by N. With each new candle, the window shifts, so the line moves across the chart. The longer the period, the smoother and slower the line becomes.
Two main types. The simple (SMA) gives all candles in the window the same weight. The exponential (EMA) gives more weight to recent candles and therefore reacts faster to reversals, but also more often jumps on noise. The choice between them is a choice between lag and false signals - there is no perfect option.
What a moving average really gives. First, direction: if the line is rising, the market is on average going up. Second, dynamic support: in a trend, the price often pulls back to the average and bounces off it. Third, crossover signals between the fast and slow line.
The main limitation is built into the formula itself. The average is calculated based on past candles, so it always shows what has already happened. In a sideways market, this turns into a stream of empty signals: the price hovers around the line, crossings occur one after another, and none of them result in movement.
