I get often asked about the best moving average and how to use moving averages the right way. In this article, and in the video above, I provide the most important tips when it comes to using moving averages the right way.
EMA vs SMA
First, it’s important to realize that the difference between the EMA and the SMA is not significant. I plotted the 50 period EMA and the 50 period SMA on the chart below and you can see right away that the two moving averages are mostly very close together.
Thus, obsessing about which type of moving average is better is a waste of time – especially once we get into the other points shortly.
Learn to deal with imperfection
This is THE most important principle when it comes to using any trading strategy successfully. Sometimes, the EMA will work. Sometimes, the SMA will work. Sometimes, both may work. And other times, none will work.
Most amateur traders will go broke because they try to achieve a winrate of 90% or 95%. Amateur traders try to avoid losses at all costs.
However, the professionals accept that their trading system will not have a high winrate and instead focus on letting winners run and cutting losses short.
Multi-timeframe moving average strategy
When it comes to using moving averages, there are endless ways for how you can go about it.
Another of using moving averages is as guidance to understand the higher-timeframe perspective. In the screenshot below I plotted a 50-period moving average from the Daily chart (blue line). The timeframe of the screenshot is the 1H and the Daily moving average helps us understand the overall trend direction.
Over the whole screenshot, the price is above the daily 50-period moving average. Thus, the price is in an overall long-term uptrend.
In an overall long-term uptrend, short-term bullish trends may be much easier to trade because it’s in line with the big picture direction. In the screenshot below the uptrend on the left moves much smoother without a lot of volatility – those moves are generally easier to trade.
The downtrend on the left shows significantly more volatility and the price action is not as clear. Thus, trading such a trending move may be much harder.
Therefore, trying to align the long-term and short-term trend direction may lead to smoother trading results.
Moving average period
Many people go crazy when it comes to the period setting of their moving average. I have seen countless traders that constantly jump around different moving average settings. This leads to inconsistent trading results and a lot of frustration.
In my trading, I settled for a 50 period moving average. The 50-period MA is generally considered a medium-term moving average and it works well for various use cases.
The most important principle is that once you have chosen a moving average setting, you don’t change it again for the next 100 to 200 trades.
Again, don’t stress about winning every single trade and learn to let winners run and cut losses short.
Long-term trend change
The screenshot below also includes the long-term Daily 50-period moving average (blue) and the 1H 50-period moving average (green).
When the price breaks both moving averages, the long- and the short-term trend direction is about to change. Those trend origins may offer high reward:risk ratio opportunities.