Moving Averages

Display Type: Overlay | Complexity: Beginner to Advanced | Best For: Trend Following, Support/Resistance

Moving averages are among the most versatile and widely-used technical indicators in trading. They smooth out price action by creating a constantly updated average price, helping traders identify trends and potential support/resistance levels.

What is a Moving Average? #

A moving average (MA) is a calculation that takes the arithmetic mean of a given set of prices over a specific number of days in the past. As new price data becomes available, the average is recalculated, creating a “moving” line that follows price action.

Key Uses: #

• Trend Identification: Price above MA = uptrend, below = downtrend
• Support and Resistance: MAs often act as dynamic support/resistance levels
• Signal Generation: Crossovers between price and MA or between multiple MAs
• Smoothing Volatility: Filters out market noise to reveal underlying trends

Types of Moving Averages #

Simple Moving Average (SMA) #

The SMA is the most basic form of moving average, calculated by adding up the closing prices for a specific number of periods and dividing by that number.

Formula:

SMA = (P₁ + P₂ + ... + Pₙ) / n

Where P = Price and n = Number of periods

Characteristics:

• Equal weight to all data points
• Slower to react to price changes
• More stable, less prone to whipsaws
• Best for identifying long-term trends

Common Periods:

• 20 SMA: Short-term trend
• 50 SMA: Intermediate trend
• 200 SMA: Long-term trend (institutional favorite)

Trading Applications:

• Golden Cross: 50 SMA crosses above 200 SMA (bullish)
• Death Cross: 50 SMA crosses below 200 SMA (bearish)
• Mean reversion strategies when price extends far from SMA

Exponential Moving Average (EMA) #

The EMA gives more weight to recent prices, making it more responsive to new information than the SMA.

Formula:

EMA = (Close - Previous EMA) × Multiplier + Previous EMA
Multiplier = 2 / (n + 1)

Characteristics:

• More weight on recent data
• Faster reaction to price changes
• Better for short-term trading
• More prone to false signals in choppy markets

Common Periods:

• 9 EMA: Very short-term
• 21 EMA: Short-term trend
• 55 EMA: Intermediate trend

Trading Applications:

• MACD uses 12 and 26 EMAs
• Trend following systems often use EMA crossovers
• Dynamic support/resistance in trending markets

Hull Moving Average (HMA) #

Developed by Alan Hull in 2005, the HMA reduces lag while maintaining smoothness by using weighted moving averages and square roots.

Formula:

HMA = WMA(2 × WMA(n/2) - WMA(n)), sqrt(n))

Where WMA = Weighted Moving Average

Characteristics:

• Extremely responsive with minimal lag
• Smooth curve despite quick reactions
• Excellent for timing entries and exits
• Can be prone to overreacting in volatile markets

Best Used For:

• Precision timing of trend changes
• Short-term trading strategies
• Confirming breakouts

Triple Exponential Moving Average (TEMA/THMA) #

TEMA attempts to remove lag by using multiple EMA calculations. It’s smoother than a single EMA but more responsive than traditional MAs.

Formula:

TEMA = 3 × EMA₁ - 3 × EMA₂ + EMA₃

Where:

• EMA₁ = EMA of price
• EMA₂ = EMA of EMA₁
• EMA₃ = EMA of EMA₂

Characteristics:

• Nearly zero lag in trending markets
• Can overshoot in volatile conditions
• Excellent trend-following capabilities
• More complex calculation

Best Used For:

• Trend confirmation
• Finding precise entry points
• Momentum trading strategies

Exponential Hull Moving Average (EHMA) #

The EHMA combines the responsiveness of the Hull MA with the smoothing characteristics of the EMA, creating a hybrid indicator.

Characteristics:

• Blends EMA and HMA calculations
• Extremely low lag
• Smooth yet responsive
• Newer indicator, less tested

Best Used For:

• Advanced traders seeking minimal lag
• High-frequency trading strategies
• Precise trend identification

Comparison Table #

MA Type	Responsiveness	Smoothness	Lag	Best For	Drawback
SMA	Low	High	High	Long-term trends	Slow to signal
EMA	Medium	Medium	Medium	All-purpose	Balance compromise
HMA	Very High	Medium	Very Low	Timing	Can overshoot
TEMA	High	Low	Low	Momentum	Complex, can be noisy
EHMA	Very High	Medium	Very Low	Precision	Less proven

Choosing the Right Moving Average #

For Long-Term Investors: #

• • Primary: 200 SMA
  • Secondary: 50 SMA
  • Reasoning: Stability over responsiveness

For Swing Traders: #

• • Primary: 21 EMA
  • Secondary: 55 EMA
  • Reasoning: Balance of responsiveness and reliability

For Day Traders: #

• • Primary: 9 HMA
  • Secondary: 21 EMA
  • Reasoning: Speed and precision crucial

For Algorithmic Trading: #

• • Primary: TEMA or EHMA
  • Secondary: Multiple EMAs
  • Reasoning: Minimal lag for automated systems

Related Indicators #

Moving Average Variants: #

• • [Weighted Moving Average (WMA)]: Linear weighting system
  • [Volume Weighted Average Price (VWAP)]: Incorporates volume
  • [Smoothed Moving Average (SMMA)]: Extra smoothing

MA-Based Indicators: #

• • [MACD]: Uses 12 and 26 EMAs
  • [Bollinger Bands]: 20 SMA with standard deviation bands
  • [Moving Average Envelope]: Percentage bands around MA
  • [Ichimoku Cloud]: Multiple MAs creating a “cloud”

Complementary Indicators: #

• • [RSI]: Confirm MA signals with momentum
  • [Volume]: Validate MA breakouts
  • [ATR]: Set stops based on volatility

Trading Strategies #

1. MA Crossover System #

• • Buy: Fast MA crosses above slow MA
  • Sell: Fast MA crosses below slow MA
  • Example: 50/200 SMA (position trading) or 9/21 EMA (swing trading)

2. Dynamic Support/Resistance #

• • Buy: Price bounces off rising MA
  • Sell: Price rejected at falling MA
  • Best with: 21 EMA or 50 SMA

3. Multiple MA Alignment #

• • Strong trend: Price > Fast MA > Medium MA > Slow MA
  • Trade in direction of alignment
  • Example: Price > 9 EMA > 21 EMA > 55 EMA

Common Settings by Timeframe #

Timeframe	Scalping	Day Trading	Swing Trading	Position Trading
Fast MA	5 EMA	9 EMA	21 EMA	50 SMA
Slow MA	13 EMA	21 EMA	55 EMA	200 SMA
Trend MA	21 EMA	50 SMA	200 SMA	200 SMA

FAQs #

What are all the types of Moving Averages? #

The main types include:

• Simple (SMA): Basic arithmetic average
• Exponential (EMA): Weighted toward recent prices
• Weighted (WMA): Linear weighting system
• Hull (HMA): Reduced lag algorithm
• Smoothed (SMMA): Extra smoothing for noise reduction
• Triple Exponential (TEMA): Multiple EMA calculations
• Volume Weighted (VWMA): Incorporates volume
• Exponential Hull (EHMA): EMA/HMA hybrid
• Arnaud Legoux (ALMA): Gaussian distribution
• Kaufman Adaptive (KAMA): Adjusts to market conditions

Which moving average is best for day trading? #

For day trading, the 9 EMA and 21 EMA are most popular due to their responsiveness. Advanced traders often prefer the Hull MA (HMA) for its minimal lag. The key is using shorter periods (5-21) rather than the type of MA itself.

Why do traders use the 200-day moving average? #

The 200 SMA represents roughly 10 months of trading days and is widely watched by institutional investors. It serves as a major psychological level and often acts as strong support/resistance. Many automated trading systems use it as a trend filter.

What’s the difference between SMA and EMA? #

The SMA gives equal weight to all periods, while the EMA gives more weight to recent prices. This makes the EMA more responsive to price changes but also more prone to false signals. The SMA is better for identifying overall trends, while the EMA is better for timing entries.

Can moving averages predict future prices? #

No, moving averages are lagging indicators that show what has already happened. They help identify trends and potential support/resistance levels but cannot predict future price movements. They’re best used for confirmation rather than prediction.

How many moving averages should I use? #

Most successful traders use 2-3 moving averages maximum:

• One fast MA: For entries and short-term trend
• One slow MA: For overall trend direction
• One very slow MA (optional): For major trend/regime

Using too many creates analysis paralysis.

What causes moving average lag? #

Lag occurs because MAs use historical data. The more periods used, the greater the lag. Simple MAs have more lag than exponential MAs. Specialized MAs like Hull and TEMA attempt to reduce this lag through mathematical techniques.

Should I use closing prices or other prices for MA calculation? #

Most traders use closing prices as they represent the market’s final consensus for that period. However, you can calculate MAs using:

• Typical Price: (High + Low + Close) / 3
• Weighted Close: (High + Low + 2×Close) / 4
• Median Price: (High + Low) / 2

Tips for Success #

1. Match MA to your timeframe: Shorter MAs for shorter holding periods
2. Confirm with volume: MA breaks with high volume are more reliable
3. Use multiple timeframes: Daily MA on hourly chart provides context
4. Respect major MAs: 50, 100, and 200 are widely watched
5. Combine with price action: MAs work best with other analysis
6. Adjust for volatility: Use ATR to set realistic expectations
7. Backtest thoroughly: Every market has different characteristics

Conclusion #

Moving averages remain fundamental to technical analysis despite their simplicity. While newer variants like HMA and TEMA offer reduced lag, the classic SMA and EMA remain the most widely used. Success comes not from finding the “perfect” moving average, but from understanding each type’s strengths and applying them appropriately to your trading style and timeframe.

Remember: Moving averages are tools for confirming trends, not crystal balls for predicting the future. Use them as part of a comprehensive trading strategy, always with proper risk management.