Moving averages and how to use them

The moving average is the oldest indicator and still the most useful — provided you understand what it
does and do not ask it to do something else.

1. What it calculates

The average closing price of the last N candles, updated each candle. Its only purpose is to
smooth the noise so the main direction is visible.

• SMA — a simple average, every candle weighted equally. Smoother, slower.
• EMA — exponentially weighted, recent candles counting for more. More responsive,
  more false signals.

2. Common periods and what they mean

• 20 — the short-term trend, about a month of trading on a daily chart.
• 50 — the medium-term trend, widely watched.
• 200 — the long-term trend. The line institutions watch most, so reactions there
  tend to be visible.

The specific number matters far less than using it consistently. There is no “correct” period; there
is one that suits your timeframe.

3. Three uses worth having

Establishing direction

Price above the 200 MA with the line sloping up → an uptrend. Simple, but it stops you selling into a
strong uptrend, which is a major source of losses.

A dynamic zone

In a clear trend, price often returns to the 20 or 50 MA and then continues. This is how to find
entries with a much better risk-reward ratio than chasing
price.

A filter

Take buy signals only above the MA, sell signals only below. That filter alone removes a large share
of counter-trend trades.

4. Crossovers: manage your expectations

The crossover of two MAs (the 50 crossing the 200, say) gets a great deal of attention, but it is a
very slow signal. By the time it happens, most of the move has occurred.

It is useful as confirmation of the long-run context; it is not useful as an entry signal.

5. The weakness to know about

A moving average is a lagging indicator — it is derived entirely from past price. In a
range, price crosses back and forth continuously and every signal is wrong. That is not a fault in the
indicator; it is using a trend tool in an environment with no trend.

The fix: decide whether the market is trending first, and only then decide whether to use an
MA at all.

6. Practical advice

One 200 MA on H4 and one 20 MA on your trading timeframe is enough for most strategies. A fourth and
fifth line does not improve results — it only creates more ways to justify a trade you already wanted to
take.

This article is for information only and is not investment advice. Conditions and fee levels are published by the brokers and can change at any time — check with the broker you actually use. Leveraged forex and CFD trading carries a high level of risk and can cost you your entire deposit.