Moving Averages
SMA, EMA, MA Crossover strategies, and Dynamic Support/Resistance
What Are Moving Averages?
A Moving Average (MA) is one of the most popular and widely used indicators in technical analysis. It smooths out price data by creating a constantly updated average price over a specific period, helping traders identify the direction and strength of a trend while filtering out short-term noise.
Types of Moving Averages
1. Simple Moving Average (SMA)
The SMA calculates the arithmetic average of prices over a specified number of periods.
Formula:
SMA = (P1 + P2 + P3 + ... + Pn) / n
Where:
P = Price (usually the closing price)
n = Number of periods
Example: 10-Period SMA
If the last 10 closing prices are: 1.0850, 1.0860, 1.0840, 1.0870, 1.0880, 1.0890, 1.0875, 1.0865, 1.0895, 1.0900
SMA(10) = (1.0850 + 1.0860 + 1.0840 + 1.0870 + 1.0880 + 1.0890 + 1.0875 + 1.0865 + 1.0895 + 1.0900) / 10
SMA(10) = 1.08725Characteristics:
- Simple to calculate and understand
- Gives equal weight to all prices in the period
- Responds more slowly to recent price changes
- Less prone to false signals but lags behind the market
2. Exponential Moving Average (EMA)
The EMA gives more weight to recent prices, making it more responsive to new information.
Key difference from SMA: While a 20-period SMA treats all 20 prices equally, a 20-period EMA gives greater importance to the most recent prices, making it react faster to price changes.
Characteristics:
- Reacts faster to recent price movements
- Better for capturing shorter-term trends
- More popular among active traders
- Can generate more false signals due to its sensitivity
3. Weighted Moving Average (WMA)
The WMA assigns linearly increasing weights to more recent data points. It falls between SMA and EMA in terms of responsiveness.
4. Smoothed Moving Average (SMMA)
A longer-period version of the SMA that provides even smoother readings. Less commonly used but available in MT5.
SMA vs EMA Comparison
| Feature | SMA | EMA |
|---|---|---|
| Weight Distribution | Equal for all periods | More weight on recent prices |
| Responsiveness | Slower | Faster |
| Lag | More | Less |
| False Signals | Fewer | More |
| Best For | Long-term trends | Short-term trends |
| Most Popular Periods | 50, 100, 200 | 9, 12, 21, 50 |
Common Moving Average Periods
Short-Term MAs (Fast)
| Period | Use Case |
|---|---|
| 5 EMA | Very short-term momentum |
| 9 EMA | Day trading entries |
| 10 SMA/EMA | Short-term trend direction |
| 20 EMA | Popular swing trading MA |
| 21 EMA | Common in Fibonacci-based systems |
Medium-Term MAs
| Period | Use Case |
|---|---|
| 50 SMA/EMA | Medium-term trend. Widely watched institutional level |
| 100 SMA | Intermediate trend filter |
Long-Term MAs
| Period | Use Case |
|---|---|
| 200 SMA | The "king" of moving averages. Defines long-term trend direction |
| 200 EMA | Faster-reacting version of the 200 SMA |
Key Insight: The 200-period SMA on the daily chart is one of the most watched levels in all of financial markets. Institutional traders, hedge funds, and algorithms all monitor this level. When price is above the 200 SMA, the market is generally considered bullish; when below, bearish.
Using Moving Averages as Dynamic Support and Resistance
Moving Averages act as dynamic (moving) support and resistance levels that adjust with each new candle.
In an Uptrend
- Price tends to bounce off the MA from above
- The MA acts as dynamic support
- Pullbacks to the MA offer buying opportunities
In a Downtrend
- Price tends to be rejected at the MA from below
- The MA acts as dynamic resistance
- Rallies to the MA offer selling opportunities
Which MA to Watch
- Fast-moving markets: Use shorter MAs (9, 20 EMA)
- Moderate trends: Use 50 EMA or SMA
- Strong established trends: Use 100 or 200 SMA
Moving Average Trading Strategies
Strategy 1: Price and MA Crossover
The simplest strategy uses the relationship between price and a single moving average.
Buy Signal: Price closes above the MA from below
Sell Signal: Price closes below the MA from above
Recommended setups:
- Price crossing the 20 EMA for short-term trades
- Price crossing the 50 SMA for swing trades
- Price crossing the 200 SMA for long-term position changes
Strategy 2: Moving Average Crossover
Using two MAs of different periods to generate signals.
Golden Cross (Bullish):
- The shorter MA crosses above the longer MA
- Example: 50 SMA crosses above 200 SMA
- Signals the beginning of a potential uptrend
Death Cross (Bearish):
- The shorter MA crosses below the longer MA
- Example: 50 SMA crosses below 200 SMA
- Signals the beginning of a potential downtrend
Popular MA pairs:
- 9 EMA + 21 EMA (short-term)
- 20 EMA + 50 EMA (medium-term)
- 50 SMA + 200 SMA (long-term, the classic Golden/Death Cross)
Caution: MA crossovers are lagging signals. By the time the cross occurs, a significant portion of the move may have already happened. They work best in trending markets but generate many false signals in sideways markets.
Strategy 3: Triple Moving Average System
Using three MAs to define trend direction and entry timing.
Setup: 9 EMA, 21 EMA, 55 EMA
Bullish condition:
- 9 EMA is above 21 EMA, which is above 55 EMA
- All three MAs are fanning upward
- Enter long on pullbacks to the 9 or 21 EMA
Bearish condition:
- 9 EMA is below 21 EMA, which is below 55 EMA
- All three MAs are fanning downward
- Enter short on rallies to the 9 or 21 EMA
Strategy 4: MA as a Trend Filter
Use a long-term MA to determine the trend, then use other tools for entry.
Rules:
- Only take buy signals when price is above the 200 SMA
- Only take sell signals when price is below the 200 SMA
- This simple filter eliminates many counter-trend trades and improves your win rate
Moving Average Ribbon
A Moving Average Ribbon displays multiple MAs of incremental periods simultaneously (e.g., 10, 20, 30, 40, 50, 60 EMA).
What the Ribbon Tells You
- All MAs aligned and spread apart (fanning): Strong trend in that direction
- MAs bunching together (converging): Trend is weakening; possible reversal or consolidation ahead
- MAs crossing over each other (twisting): Trend change in progress
- The wider the fan, the stronger the trend
Common Mistakes with Moving Averages
1. Using MAs in Sideways Markets
MAs are trend-following tools. In ranging markets, they generate constant false signals as price whipsaws back and forth around the average.
Solution: Only use MA signals when there is a clear trend. Use other tools (RSI, Support/Resistance) for ranging markets.
2. Optimization Obsession
Constantly changing MA periods trying to find the "perfect" setting leads to curve-fitting, where the MA works perfectly on historical data but fails in live trading.
Solution: Stick with standard, widely-used periods (20, 50, 100, 200) that other traders also watch.
3. Ignoring Lag
All moving averages lag behind price. They tell you what has happened, not what will happen. Never rely on MAs alone for entry decisions.
Solution: Combine MAs with leading indicators and price action analysis.
4. Using Too Many MAs
Having five or six MAs on your chart creates confusion and conflicting signals.
Solution: Use a maximum of 2-3 MAs with clearly defined roles (e.g., fast for entry, slow for trend direction).
Practical Application in MT5
Adding a Moving Average in MT5
1. Open the Navigator panel (Ctrl+N)
2. Expand Indicators > Trend
3. Drag Moving Average onto your chart
4. Configure the settings:
- Period: Number of candles to average (e.g., 200)
- Shift: Horizontal offset (usually 0)
- Method: Simple, Exponential, Smoothed, or Linear Weighted
- Apply to: Close, Open, High, Low, etc. (Close is standard)
- Style: Choose color and line thickness
Recommended Chart Setup
- 200 SMA in blue (long-term trend direction)
- 50 EMA in orange (medium-term trend)
- 20 EMA in green (short-term trend and dynamic S/R)
Key Takeaways
- Moving Averages smooth price data to reveal the underlying trend direction
- SMA gives equal weight to all periods; EMA gives more weight to recent prices
- The 200 SMA on the daily chart is the most widely watched moving average globally
- MAs act as dynamic support in uptrends and dynamic resistance in downtrends
- Golden Cross (bullish) and Death Cross (bearish) are the most well-known MA crossover signals
- Moving Averages work best in trending markets and poorly in ranging markets
- Use MAs as trend filters combined with other tools for entry signals
- Stick to standard periods that other market participants also use
Next Lesson: In the next lesson, we will explore Indicators: RSI, MACD, and Bollinger Bands - essential oscillators and volatility tools for your trading toolbox.