How To Use Moving Averages – Moving Average Trading 101

Advertisement - External Link

How To Use Moving Averages – Moving Average Trading 101

Moving averages are without a doubt the most popular trading tools. Moving averages are great if you know how to use them but most traders, however, make some fatal mistakes when it comes to trading with moving averages. In this article, I show you what you need to know when it comes to choosing the type and the length of the perfect moving average and the 3 ways how to use moving averages when making trading decisions.



Step 1: What is the best moving average? EMA or SMA?

At the beginning, all traders ask the same questions, whether they should use the EMA (exponential moving average) or the SMA (simple/smoothed moving average). The differences between the two are usually subtle, but the choice of the moving average can make a big impact on your trading. Here is what you need to know:


#1 The differences between EMA and SMA

There is really only one difference when it comes to EMA vs. SMA and it’s speed. The EMA moves much faster and it changes its direction earlier than the SMA. The EMA gives more weight to the most recent price action which means that when price changes direction, the EMA recognizes this sooner, while the SMA takes longer to turn when price turns.


#2 Pros and cons – EMA vs SMA

There is no better or worse when it comes to EMA vs. SMA. The pros of the EMA are also its cons – let me explain what this means:

The EMA reacts faster when the price is changing direction, but this also means that the EMA is also more vulnerable when it comes to giving wrong signals too early. For example, when price retraces lower during a rally, the EMA will start turning down immediately and it can signal a change in the direction way too early. The SMA moves much slower and it can keep you in trades longer when there are short-lived price movements and erratic behavior. But, of course, this also means that the SMA gets you in trades later than the EMA.


#3 Resume

In the end, it comes down to what you feel comfortable with and what your trading style is (see next points). The EMA gives you more and earlier signals, but it also gives you more false and premature signals. The SMA provides less and later signals, but also less wrong signals during volatile times.

In my trading, I use an SMA because it allows me to stay in trades longer as a swing trader.

how to use moving averages 1


Step 2: What is the best period setting?

After choosing the type of your moving average, traders ask themselves which period setting is the right one that gives them the best signals?!

There are two parts to this answer: first, you have to choose whether you are a swing or a day trader. And secondly, you have to be clear about the purpose and why you are using moving averages in the first place. Let’s go about this now:


#2 The self-fulfilling prophecy

More than anything, moving averages “work” because they are a self-fulfilling prophecy, which means that price action respects moving averages because so many traders use them in their own trading. This raises a very important point when trading with indicators:

You have to stick to the most commonly used moving averages to get the best results. Moving averages work when a lot of traders use and act on their signals. Thus, go with the crowd and only use the popular moving averages.


Our new price action course


#3 The best moving average periods for day-trading

When you are a short-term day trader, you need a moving average that is fast and reacts to price changes immediately. That’s why it’s usually best for day-traders to stick with EMAs in the first place.

When it comes to the period and the length, there are usually 3 specific moving averages you should think about using:

  • 9 or 10 period: Very popular and extremely fast-moving. Often used as a directional filter (more later)
  • 21 period: Medium-term and the most accurate moving average. Good when it comes to riding trends
  • 50 period: Long-term moving average and best suited for identifying the longer-term direction


how to use moving averages 2


#4 The best periods for swing-trading

Swing traders have a very different approach and they typically trade on the higher time frames (4H, Daily +) and also hold trades for longer periods of time. Thus, swing-traders should first choose a SMA and also use higher period moving averages to avoid noise and premature signals. Here are 4 moving averages that are particularly important for swing traders:

  • 20 / 21 period: The 21 moving average is my preferred choice when it comes to short-term swing trading. During trends, price respects it so well and it also signals trend shifts.
  • 50 period: The 50 moving average is the standard swing-trading moving average and very popular. Most traders use it to ride trends because it’s the ideal compromise between too short and too long term.
  • 100 period: There is something about round numbers that attract traders and that definitely holds true when it comes to the 100 moving average. It works very well for support and resistance – especially on the daily and/or weekly time frame
  • 200 / 250 period: The same holds true for the 200 moving average. The 250 period moving average is popular on the daily chart since it describes one year of price action (one year has roughly 250 trading days)


how to use moving averages 3




Step3: How to use moving averages – 3 usage examples

Now that you know about the differences between the moving averages and how to choose the right period setting, we can take a look at the 3 ways moving averages can be used to help you find trades, ride trends and exit trades in a reliable way.


#1 Trend direction and filter

Market Wizard Marty Schwartz was one of the most successful traders ever and he was a big advocate of moving averages to identify the direction of the trend. Here is what he said about them:

“The 10 day exponential moving average (EMA) is my favorite indicator to determine the major trend. I call this “red light, green light” because it is imperative in trading to remain on the correct side of a moving average to give yourself the best probability of success. When you are trading above the 10 day, you have the green light, the market is in positive mode and you should be thinking buy. Conversely, trading below the average is a red light. The market is in a negative mode and you should be thinking sell.” – Marty Schwartz

Marty Schwartz uses a fast EMA to stay on the right side of the market and to filter out trades in the wrong direction. Just this one tip can already make a huge difference in your trading when you only start trading with the trend in the right direction.


how to use moving averages 4


The Golden Cross and the Death Cross

But even as swing traders, you can use moving averages as directional filters. The Golden and Death Cross is a signal that happens when the 200 and 50-period moving average cross and they are mainly used on the daily charts.

In the chart below, I marked the Golden and Death cross entries. Basically, you would enter short when the 50 crosses the 200 and enter long when the 50 crosses above the 200 periods moving average. Although the screenshot only shows a limited amount of time, you can see that the moving average cross-overs can help your analysis and pick the right market direction.



#2 Support and resistance and stop placement

The second thing moving averages can help you with is support and resistance trading and also stop placement. Because of the self-fulfilling prophecy we talked about earlier, you can often see that the popular moving averages work perfectly as support and resistance levels.


Word of caution: Trend vs ranges

Moving averages don’t work in ranging markets. When price ranges back and forth between support and resistance, the moving average is usually somewhere in the middle of that range and price does not respect it that much.

The screenshot below shows a price chart with a 50 and 21 period moving average. You can see that during the range, moving averages completely lose their validity, but as soon as the price starts trending and swinging, they perfectly act as support and resistance again.



#3 Bollinger Bands and the end of a trend

The Bollinger Bands are a technical indicator based on moving averages. In the middle of the Bollinger Bands, you find the 20 periods moving average and the outer Bands measure price volatility.

During ranges, the price fluctuates around the moving average, but the outer Bands are still very important. When price touches the outer Bands during a range, it can often foreshadow the reversal in the opposite direction when it’s followed by a rejection. So, even though moving averages lose their validity during ranges, the Bollinger Bands are a great tool that still allows you to analyze price effectively.

During trends, Bollinger Bands can help you stay in trades. During a strong trend, the price usually pulls away from its moving average, but it moves close to the Outer Band. When price then breaks the moving average again, it can signal a change in direction. Furthermore, whenever you see a violation of the outer Band during a trend, it often foreshadows a retracement – however, it does NOT mean a reversal until the moving average has been broken.




You can see that moving averages are a multi-faceted tool that can be used in a variety of different ways. Once a trader understands the implications of EMA vs SMA, the importance of the self-fulfilling prophecy and how to pick the right period setting, moving averages become an important tool in a trader’s toolbox.




How you talk or think about your trades can signal how you are going to manage your trade and your
I am a systematic discretionary trader. If I had to make an estimate of how much is systematic and how
Last week, I traded the CHFJPY and the trade went into my target. Great! No! Because the price kept on
Being a forex trader is more than just buying and selling some currencies, but the fewest traders are aware of
I am a purely technical trader and I never ever trade the news or a big fundamental event. Some traders
Understanding what other traders do, how they look at charts and how they perceive information is vital for your own

Comments ( 40 )

  • Romz

    thank you idol..its inspire me lot..

    • Fred

      Very educative. I need more of it. I just want to start forex trading and I need to have the basic knowledge.

        • Henry

          By the way thanks,u have truly answered my question

        • Bruno nery

          é util no mercado brasileiro ou é apenas para forex ? aqui no mercado brasileiro utilizo as médias de 200 e de 20 no day-trade.

        • Erdinç

          How do you feel about the Hull MA?

        • Dave

          Hi, does this indicators work for Crypto currency trading?

      • Nkosinathi

        Eye opening explanations.Thanx Rolf.
        Golden& Death cross
        Support and Resistance,Got it!!

  • Saba

    Is the Forex course on your site the only course I’ll need to buy or is there a pro level and another level after that? I guess I want to know how much investment is needed to get to the top level of forex trading? Do you have daily/weekly setups or signals or webinars? How do students interact with you?
    Sorry for all the questions…

    • Rolf

      Hi Saba,

      yes, it’s really all you need and every week I add a new video with the best setups for the next days. No signals but I break down the whole Forex market and share what I am interested in trading.
      I am available every day in the forum and I answer all questions at least once or twice per day. I also review trades in the private forum and provide help where I can.


  • Romy

    This is very helpful. Thank you for sharing this.

  • Kelly

    Thanks for the insight into Moving Averages, and Bollinger bands!

  • William

    this material is really helpful, i appreciate you, thanks man.

  • Pedro

    Hello! I think your material is excellent. What course do you recommend for a begginer? The stocks or the forex and futures? Thanks!

    • Rolf

      Hi there and thanks

      that really depends on which market do you want to trade but generally most of our students start with the Forex course.


  • Ehsan

    Can you help to set EMA? I can’t find it in indicator list! I’m a day-trader. Need this:
    9 or 10 period
    21 period
    50 period

  • Isaiah

    You are great! I really love this article. It breaks the moving averages into pieces. It is so detailed and very helpful. Thank you for a job well done.

  • Darren

    This is probably the best Moving Average information I have ever seen and now I totally get it. I never understood / liked Bollinger Bands until now either. Its a really big help. Thank you so much.
    I have your Trend Rider indicator which is also amazing. It gives me the confidence to enter a trade and believe in my own analysis, not always getting all of the movement, but “profit is profit”.

  • Ramesh

    I always like your videos and blogs. May be one day I will enroll to ur course. I am really happy to be in touch

    • Victor

      Very nice explanation. Many thanks for that. However, what settings will you recommend for scalping? Anticipating your response. Thanks

    • Abraham

      Yah good I have learn a lot about moving average strategy.

  • Ligee

    Thank you so much I should have come to this page before I keep on giving brokers y money and now I’m going for a murder thank you so much for the explanation like Abc

  • Michael

    This is fantastic, very educative thanks


    Thanks for the article very helpful,

    Can this strategy be used to buy stocks and etf or does it only work for Forex?

  • Anonymous

    Thank you so much I really appreciate your article it help me a lot and clear all my misunderstanding on SMA and EMA.
    I look forward to more of your write up on volume. Thanks

    • Sibusiso

      Very resourceful information

  • Adeyemi

    Nice work I really appreciate your article,it help me a lot to understand SMA and EMA more and clear all the confusion that surround it. I look forward to your next article adding Volume to it. Thanks

  • Victoria

    Thanks so much for this educative and helpful article.

    Please what time interval can really go well with MA?

  • Lucas

    Hi there,
    Your knowledge is excellent. Thanks you so much.

  • Jay rijiya

    This is awesome..thanks

  • Anonymous

    A perfect explanation that is eye opening. Thanks

  • Davecruz

    This is detailed and rich.

  • Srini Rao

    Thank you so much. The article was very useful and very nicely explained in detailed.

  • Anonymous

    Examples of death cross and golden cross on the set of moving averages you choose,short term,medium term and long term basis

  • Anonymous

    Impressive Explainations

  • Man

    Great explanation. Thanks man

  • Happiness

    Great insight of moving averages.Thumbs up!

  • Fdouier

    This was very helpful and clear, new ideas and strategies came up to my mind after reading this.

    Thank you mate.

    Goodluck Trading to All!

  • Anonymous

    Do you set your MAs to measure the close price, hlc, ohlc ?

  • Kathy

    Thank you very much. I always thought it was 10 day and 30 day, so I learned a lot today.

Cookie Consent

This website uses cookies to give you the best experience. Agree by clicking the 'Accept' button.