Moving Averages (MAs)

◙ Primary Use: Evaluating Market Trends and Spotting Reversals

◙ Trading: Spotting trend reversals (MA Crossovers)

◙ Combination: Confirming trends when combined with other indicators (RSI, ADX)

◙ Standard Settings: 10-period, 21-period, 30-period, 50-period, 200-period MAs

 

Introduction to Moving Averages

Moving Averages (MAs) are foundational tools in technical analysis, offering a simple yet effective way to smooth price data and filter out market noise. By comparing an asset’s price to its moving average—such as a 50-day MA—traders can quickly assess whether the asset is trending or potentially overbought/oversold.

Key Benefits of Using MAs in Trading

1. Smooth out market noise for clearer trend direction

2. Work across all timeframes and markets (stocks, forex, commodities, etc.)

3. Can serve as a confirmation tool when used with other indicators (e.g., RSI, ADX)

4. Often used in automated trading systems or combined into complex strategies

 

 Types of Moving Averages & Their Calculations

Main types of moving averages and their calculation.

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1. Simple Moving Average (SMA)

• Shows the average closing price over a specific period.

• Easy to calculate and widely used.

Formula: 

• SMA = Sum of Closing Prices / Number of Periods

Example: If prices over 3 days are $100, $105, $110 → SMA = $105

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2. Exponential Moving Average (EMA)

• Gives greater weight to recent prices, making it more responsive to recent price movements.

Formula:

• EMA = (Current Price × T) + (EMA of Previous Day × (1 − T))
• Where T = 2 / (Number of Periods + 1)

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3. Weighted Moving Average (WMA)

• Like EMA, WMA gives more importance to recent prices, but it uses linearly weighted coefficients.

Formula:

• WMA = (Sum of Weighted Closing Prices) / (Sum of Weights)

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4. Smoothed Moving Average (SMMA)

• Provides even smoother trends by reducing the effect of short-term volatility.

Step 1 (SMA1):

• SMA1 = Sum of Closing Prices / Number of Periods

Step 2 (SMMA):

• SMMA = {Sum(T) – SMA1 + Closing Price} / T
• Where T = Number of Periods

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5. Triangular Moving Average (TMA)

• A double-smoothed average, calculated by taking the average of SMAs over time.

Formula:
TMA = Sum of SMA values / Number of Periods

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6. Moving Average Envelopes

• Consist of an SMA and two bands (upper and lower) formed by applying a fixed percentage.

Formulas:

• Upper Band = SMA × (1 + P%)
• Lower Band = SMA × (1 − P%)
• Where P is usually 1%, adjusted for volatility

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 Trading Signals from Moving Average Crossovers

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1. MA Crossovers

Crossovers between two MAs (one fast, one slow) can signal potential trend reversals:

• Bullish Crossover: Fast MA crosses above the slow MA

• Bearish Crossover: Fast MA crosses below the slow MA

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2. Price Crossovers

When the price itself crosses an MA, it can also generate signals:

• Bullish Price Crossover: Price rises above the MA

• Bearish Price Crossover: Price falls below the MA

⚠️ These signals are more reliable when the slope of the MA matches the trend direction.

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3. Trading Using MA Envelopes

Rules:

• Buy when price touches the lower band, target the upper band

• Sell when price hits the upper band, target the lower band

✅ Confirm signals with other indicators like RSI or Williams %R

 

Example Strategy: 2-SMA + ADX Confirmation

A simple yet effective trend-following system:

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Setup:

• Chart: H1 (Hourly) timeframe

• Indicators:

  • SMA-10 (fast)

  • SMA-21 (slow)

  • ADX (Average Directional Index)

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Trading Rules:

• Buy Signal:

  • SMA-10 crosses above SMA-21

  • ADX is falling (indicates a possible new trend forming)

• Sell Signal:

  • SMA-21 crosses above SMA-10

  • ADX is rising (suggests strengthening bearish trend)

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Platform Setup (MetaTrader 4 or 5)

To install a Moving Average:

• Navigation:

  INDICATORS → TREND → MOVING AVERAGE

• Recommended MA Periods:

  • Forex: 34, 55, 89, 144, 233

  • Equities: 30, 200

 

■ Trading with Moving Averages

George Protonotarios for ExpertSignal.com (c)