Moving averages are one of the most widely used technical indicators. Find out how a moving average trading strategy works, the different types of moving averages, and how traders apply them.
A moving average trading strategy uses the average price of an asset over a set number of periods to smooth out short-term fluctuations and identify the underlying trend. Traders use moving averages to spot trend direction, potential support and resistance, and entry and exit signals.
A moving average is calculated by adding the closing prices for a number of periods and dividing the total by that number. As each new period closes, the oldest price drops out, so the average "moves" along the chart.
Short-term moving averages (such as 10 or 20 periods) react quickly to price changes and suit active traders. Longer averages (such as 50, 100 or 200 periods) are slower but better at showing the broader trend.
When price trades consistently above a rising moving average, the market is generally considered to be in an uptrend. When price is below a falling moving average, it suggests a downtrend.
Moving averages often act as dynamic support in uptrends and resistance in downtrends. Traders watch how price reacts when it touches widely followed averages such as the 50-day or 200-day.
Simple moving average (SMA): SMA = (P1 + P2 + … + Pn) / n, where P is the closing price and n is the number of periods.
Exponential moving average (EMA): EMA = (Close − Previous EMA) × Multiplier + Previous EMA, where the multiplier is 2 / (n + 1). The EMA gives more weight to recent prices.
Weighted moving average (WMA): each price is multiplied by a weighting factor, with the most recent price given the highest weight, and the total divided by the sum of the weights.
A crossover occurs when a short-term moving average crosses a long-term one. A "golden cross" – the 50-period crossing above the 200-period – is seen as bullish, while a "death cross" – the 50 crossing below the 200 – is seen as bearish.
Bollinger Bands place bands two standard deviations above and below a 20-period SMA. Prices near the upper band may indicate overbought conditions, and near the lower band oversold conditions. Narrowing bands can signal an upcoming breakout.
Envelopes are lines plotted a fixed percentage above and below a moving average. Traders use them to identify overextended price moves and potential reversals within a trend.
Combining moving averages with momentum indicators and volume can help confirm signals and filter out false ones in choppy markets.
Moving averages are versatile tools, but because they lag price, they work best in trending markets and when used alongside other forms of analysis and sound risk management.
The exponential moving average is a type of moving average that places greater weight on the most recent data points, making it more responsive to new information than the simple moving average.
Because the EMA reacts more quickly to price changes, traders often use it for shorter-term strategies and to spot trend changes earlier.
| EMA period | Typical use | Trading style |
|---|---|---|
| 9 | Very short-term momentum | Scalping, day trading |
| 12 / 26 | MACD calculation | Short to medium-term |
| 20 | Short-term trend | Day and swing trading |
| 50 | Medium-term trend | Swing trading |
| 200 | Long-term trend | Position trading |
Shorter EMAs give more signals but also more false signals. Longer EMAs are more reliable for trend identification but slower to react.
Designed to reduce lag further by combining a single and double-smoothed EMA.
Extends the DEMA concept with a third smoothing, further reducing lag.
The Hull moving average (HMA), developed by Alan Hull, aims to reduce lag while maintaining smoothness. It uses weighted moving averages and the square root of the period to produce a fast, smooth line.
A rising HMA suggests an uptrend and a falling HMA a downtrend. Traders may enter when the HMA changes direction, or use crossovers of two HMAs of different lengths.
The moving average convergence divergence (MACD) is a momentum indicator that shows the relationship between two EMAs, typically the 12- and 26-period. The MACD line is the difference between them, and a 9-period EMA of the MACD line is plotted as the signal line.
Crossovers of the MACD and signal lines, moves above or below zero, and divergence between MACD and price are all used as trading signals.
The average directional index (ADX) measures the strength of a trend, regardless of its direction. It's plotted alongside the positive (+DI) and negative (−DI) directional indicators.
An ADX reading above 25 generally indicates a strong trend, while a reading below 20 suggests a weak or ranging market.
A falling ADX after a strong trend can signal that the trend is losing momentum and may reverse.
Combining ADX with support and resistance levels can help confirm whether a breakout is likely to hold.
ADX shows trend strength but not direction, so it's commonly paired with moving averages or the directional indicators to decide whether to go long or short.
Technical indicators help traders interpret price action, but none are infallible. Combining several tools with a clear plan and disciplined risk management gives the best chance of consistent results.