Key Takeaways
- Moving Averages Simplify Price Action: They smooth out volatility and highlight overall market trends, making them one of the most popular tools in trading.
- Types of Moving Averages: Traders commonly use the Simple Moving Average (SMA) for long-term clarity and the Exponential Moving Average (EMA) for quicker reactions.
- Short, Medium, and Long-Term Use: Short-term (10–20) for intraday, medium-term (50) for swing trades, and long-term (100–200) for investors.
- Practical Uses: Moving averages help identify trend direction, act as dynamic support/resistance, and signal potential trend reversals through crossovers.
- Beginner Strategies: Trend-following, crossover (Golden Cross/Death Cross), and support/resistance bounce strategies are easy ways to apply moving averages.
- Risk Management Matters: Stop-loss and take-profit orders, position sizing, and confirmation from other indicators reduce false signals.
- Trading with MultiBank Group: Access 20,000+ instruments with 0.0 pip spreads, ECN execution, and advanced tools on MT4, MT5, and the MultiBank App.
Moving averages are one of the most widely used tools in trading. From beginners learning the basics to professional traders managing large portfolios, moving averages help simplify price action and make sense of the markets.
At their core, moving averages smooth out market noise, showing whether prices are trending up, trending down, or moving sideways. Because of their simplicity and effectiveness, they are often the first indicator traders add to their charts.
In this guide, we will explain what moving averages are, the different types, and how you can use them in your trading. We will also cover beginner-friendly strategies, common mistakes to avoid, and how to manage risk when applying moving averages in real market conditions. By the end, you will have a practical understanding of how to integrate them into your trading routine.
What Are Moving Averages?
A moving average is a line that shows the average price of a market over a set number of past periods. It “moves” because the calculation updates with each new price candle on the chart.
Traders use moving averages for three main reasons:
- To spot the trend direction: If the market price is above the moving average, it suggests an uptrend. If it is below, it suggests a downtrend.
- To smooth out volatility: Short-term price swings can be noisy and confusing. A moving average filters out some of that noise, so the bigger picture is clearer.
- To identify potential support and resistance: Moving averages often act as “dynamic levels,” where price bounces or reverses.
For example, if EUR/USD is trading above its 50-day moving average, traders may treat the line as support and look for buying opportunities when price comes close to it.
Think of moving averages as a way to “zoom out” from the short-term ups and downs, so you can see the overall direction of the market more clearly.
Types of Moving Averages
Not all moving averages are the same. Traders often choose between different types depending on their trading style, time horizon, and market conditions. The two most commonly used are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
Simple Moving Average (SMA)
The SMA is the most straightforward type. It calculates the average closing price of a market over a set number of periods. For example, a 20-day SMA adds up the closing prices from the last 20 days and divides by 20.
Strengths of SMA
- Easy to calculate and interpret
- Works well for identifying overall trends
- Less sensitive to sudden price spikes, so it gives a smoother view
Limitations of SMA
- Because it gives equal weight to all data points, it reacts more slowly to recent price changes
- May lag in fast-moving markets
Example: If gold is trading above its 200-day SMA, many traders see this as a sign of a long-term uptrend.
Exponential Moving Average (EMA)
The EMA is similar to the SMA but gives more weight to recent prices. This makes it respond faster to new information in the market.
Strengths of EMA
- Reacts more quickly to price changes, which helps traders spot trends earlier.
- Useful in short-term trading strategies like day trading or scalping
Limitations of EMA
- Because it is more sensitive, it can produce more false signals during sideways or choppy markets
- Can be harder for beginners to interpret if used alone
Example: A 20-day EMA may turn upward sooner than a 20-day SMA when prices start rising, giving an earlier signal to enter a trade.
Short-Term vs Long-Term Moving Averages
Another way traders categorize moving averages is by length:
- Short-term averages (10–20 periods): More responsive, used by intraday or swing traders to capture quick moves
>> A day trader might use a 10-EMA to spot quick intraday moves - Medium-term averages (50 periods): Commonly used to confirm the strength of an ongoing trend
>> A swing trader could rely on a 50-SMA to filter trades in the direction of the broader trend - Long-term averages (100–200 periods): Slower-moving, used by investors to identify major trends and overall market direction
>>A long-term investor often watches the 200-SMA as a dividing line between bullish and bearish conditions
Most traders combine different types and lengths of moving averages for confirmation. For example, pairing a short-term EMA with a long-term SMA can help identify both immediate momentum and the bigger picture trend.
Best Moving Average Settings for Forex, Stocks, and Commodities
Not all markets behave the same way, which is why traders often adjust their moving average settings depending on the asset class. While there is no universal “perfect” moving average, some settings are widely recognized as effective starting points. Understanding the best moving average for trading in different markets can help you choose the right tool for your strategy.
Forex
The forex market is highly liquid and often moves in strong short- to medium-term trends. Traders typically use faster moving averages like the 20-EMA and 50-EMA to capture momentum.
- 20-EMA: Helps spot short-term trend changes on intraday or swing setups.
- 50-EMA: Filters the broader trend direction, often used as a confirmation before entering trades.
Example: If EUR/USD is trading above both the 20-EMA and 50-EMA, traders may look for long setups in line with the trend.
Stocks
Company shares usually move slower than forex and are more influenced by earnings cycles and long-term investor sentiment. This makes longer moving averages like the 50-SMA and 200-SMA especially popular.
- 50-SMA: Tracks the medium-term trend and is often used by analysts to gauge market strength.
- 200-SMA: Considered a key long-term indicator. Many traders view price above the 200-SMA as bullish and below it as bearish.
Example: A “Golden Cross” in stocks occurs when the 50-SMA crosses above the 200-SMA, often signaling the start of a long-term uptrend.
Metals & Commodities
Metals and Commodities like Gold and Crude Oil are highly volatile and sensitive to global events, which makes shorter moving averages more effective for timing trades.
- 20-EMA: Favored for short-term trading because it reacts quickly to sudden price changes.
- 50-SMA or EMA: Provides confirmation of medium-term momentum and helps filter out false signals.
Example: If gold is trending higher but pulls back to its 20-EMA before bouncing, traders may use the EMA as dynamic support for entry.
How to Use Moving Averages in Trading
Moving averages are versatile tools. They can show you the overall direction of the market, highlight potential entry and exit points, and even act as levels of support and resistance. Here are the main ways traders use them:
Identifying Trend Direction
One of the simplest uses of moving averages is spotting whether the market is in an uptrend, downtrend, or range.
- If price stays above a moving average, it suggests an uptrend.
- If price stays below, it suggests a downtrend.
- If price crosses back and forth, the market may be ranging.
Example: If EUR/USD is trading above its 50-day moving average for several weeks, many traders will look for buying opportunities rather than selling.
Dynamic Support and Resistance
Unlike fixed horizontal levels, moving averages can act as “dynamic” support and resistance. Price often bounces near the average before continuing in the same direction.
- In an uptrend, moving averages can serve as support.
- In a downtrend, they can act as resistance.
Example: If gold pulls back to its 20-day EMA during an uptrend and then bounces higher, traders may enter long positions, treating the EMA as support.
Crossovers (Golden Cross and Death Cross)
Crossovers happen when two moving averages of different lengths intersect. They are popular signals for trend shifts.
- Golden Cross: A shorter moving average (e.g. 50-day) crosses above a longer one (e.g. 200-day), suggesting a new uptrend.
- Death Cross: A shorter moving average crosses below a longer one, suggesting a potential downtrend.
Example: If the 50-SMA crosses above the 200-SMA on a stock chart, many traders see this as a bullish signal.
Limitations of Moving Averages
It is important to remember that moving averages are lagging indicators. They are based on past prices, so signals can sometimes arrive after a move has already begun.
In strong trends, this lag may not matter much, since trends can last for weeks or months. In sideways or choppy markets, moving averages can give false signals as price whipsaws above and below.
Many traders combine moving averages with other indicators like RSI or MACD for confirmation, reducing the risk of false signals.
Moving Average Trading Strategies for Beginners
Moving averages are not just for observing trends. They can form the basis of practical trading strategies. Here are three beginner-friendly approaches you can try:
Trend-Following Strategy
This strategy uses a moving average to confirm the direction of the market and trade in line with it.
How it works:
- Add a medium or long-term moving average to your chart (commonly the 50-day or 200-day SMA). If price is consistently above the line, only look for buy (long) opportunities. If price is below, only look for sell (short) opportunities.
- Enter trades when price pulls back toward the moving average and resumes the trend.
Example:
- Suppose EUR/USD has been trading above its 50-day SMA for two months. The 50-day SMA is currently at 1.0850.
- Price pulls back from 1.0950 down to the SMA at 1.0850, then prints a bullish candlestick.
- A trader opens a long position at 1.0860, placing a stop-loss just below the SMA at 1.0835, and targets the recent high at 1.0950 or higher.
In this setup, the trader risks about 25 pips to potentially capture a move of 90 pips, creating a favorable risk-to-reward ratio.
This approach helps beginners avoid trading against the trend and keeps entries simple, while also showing how to place stops and targets logically around the moving average.
Crossover Strategy
The crossover strategy uses two moving averages of different lengths to generate signals when they cross.
How it works:
- Apply a short-term moving average (e.g., 20-day EMA) and a longer one (e.g., 50-day SMA).
- When the short-term average crosses above the longer one, it signals a potential uptrend (buy signal).
- When the short-term average crosses below, it signals a potential downtrend (sell signal).
Example:
- A trader applies a 20-EMA and 50-SMA to XAU/USD. The 20-EMA crosses above the 50-SMA when gold is trading around $3,450 per ounce, suggesting bullish momentum.
- The trader enters a long position at $3,452, placing a stop-loss just below the recent swing low at $3,430.
- Over the next two weeks, Gold climbs steadily to $3,520.
- Weeks later, the 20-EMA crosses back below the 50-SMA near $3,510, signaling an exit. The trader closes the trade, capturing about 58 points ($3,452 → $3,510) while keeping risk limited to 22 points ($3,452 → $3,430).
Support and Resistance Bounce Strategy
Moving averages can act as “dynamic” support or resistance, meaning price often reacts when it approaches them.
How it works:
- Identify a clear trend using a moving average (e.g., 20-day EMA for short-term or 50-day SMA for medium-term).
- Wait for price to approach the moving average.
- Look for a confirmation signal, such as a bullish candlestick pattern in an uptrend or a bearish one in a downtrend.
- Enter the trade in the direction of the trend, using the moving average as a guide for stop-loss placement.
Example:
- Crude oil is trending higher above the 20-day EMA, which is sitting around $78.50 per barrel.
- Price rallies up to $81.20, then dips back toward the 20-day EMA at $78.50. At the EMA, a bullish engulfing candle forms, showing buyers stepping in.
- The trader enters a long position at $78.80, placing a stop-loss just below the EMA at $77.90. Price then bounces off the EMA and climbs to $83.00, turning the moving average into dynamic support.
In this setup, the trader risks about 90 cents per barrel to potentially capture a move of more than $4.00, creating a solid risk-to-reward ratio. This strategy is popular because it combines trend-following with timing entries at better prices.
On MultiBank Group’s MT4, MT5, and MultiBank App, you can apply these strategies with built-in moving averages, set alerts when price touches your chosen levels, and manage trades directly from the chart with stop-loss and take-profit orders.
Common Mistakes with Moving Averages
Moving averages are simple tools, but beginners often use them incorrectly. Here are the most common mistakes and how to avoid them:
Using only Moving Averages for Decisions
Relying solely on moving averages can be risky. Since they are lagging indicators, signals often come after a move has already started. Combine moving averages with other tools like support and resistance, RSI, or MACD to confirm your trades.
Choosing the Wrong Length
A 200-day SMA is too slow for day trading, and a 10-EMA may be too fast for long-term investing. Many beginners apply random settings without understanding their purpose. Match the moving average length to your trading style. Short-term traders often use 10–20 periods, swing traders use 50, and long-term traders watch 100–200.
Using Too Many Moving Averages at Once
Some traders add five or more moving averages, cluttering the chart until it becomes confusing. Keep it simple. Start with one or two moving averages that match your strategy.
Ignoring the Overall Market Context
A moving average may suggest a trend, but if the market is choppy or ranging, the signals will be unreliable. Always check the bigger picture. If price is whipsawing back and forth, wait until a clearer trend forms before relying on moving averages.
Placing Stops Directly on the Moving Average Line
Beginners often put their stop-loss exactly at the moving average. Since price often dips slightly below or above before continuing, these stops can get triggered unnecessarily. Place stops a little beyond the moving average, giving the trade room to breathe.
Ignoring Different Timeframes
Looking at moving averages on a 5-minute chart without checking the daily or weekly trend can lead to trading against the larger move.
Use multiple timeframes. For example, check the daily chart for the big trend, then fine-tune entries on the 1-hour chart.
On MultiBank Group platforms, you can apply multiple moving averages across different timeframes and customize settings easily. Clean charts, alerts, and advanced order types help you avoid these beginner mistakes and trade with more discipline.
Managing Risk When Using Moving Averages
Moving averages can help you spot opportunities, but they are not foolproof. Since they are based on past prices, they sometimes give signals late or create false setups in sideways markets. This is why risk management is essential when using them in your trading.
Use Stop-Loss Orders
Never rely on a moving average alone to protect you. Place a stop-loss beyond recent highs or lows, rather than directly on the moving average line.
- Example: If you buy EUR/USD on a bounce from the 50-day SMA at 1.0900, and the recent swing low is 1.0875, your stop might be set just below 1.0875 instead of right at the SMA.
Set Realistic Take-Profit Targets
Moving averages can show you where the trend might continue, but price often stalls at the next support or resistance level.
- Example: If gold is trending higher above its 20-EMA, you may take profit near a previous swing high instead of waiting indefinitely.
Size Your Positions Properly
Your position size should depend on the distance between entry and stop-loss. Wider stops (such as with a 200-SMA) require smaller position sizes to keep risk under control.
- Example: If your account is $1,000 and you risk 2% ($20), and your stop-loss is 50 pips away, your position size should be 0.04 lots.
Combine Moving Averages with Confirmation Tools
A moving average may show the trend, but confirmation improves your chances of success. Look for supporting signals from RSI, MACD, or price action patterns.
- Example: If the 20-EMA acts as support during an uptrend and RSI also shows oversold conditions, this strengthens the case for a long entry.
Be Mindful of Timeframes
Risk increases when you ignore higher timeframes. A buy signal on the 15-minute chart may fail if the daily trend is strongly bearish. Always align your trades with the broader trend.
On MultiBank Group’s MT4, MT5, and MultiBank App, you can place stop-loss and take-profit orders directly on the chart, calculate lot sizes with built-in tools, and add multiple indicators to confirm your signals. Combined with negative balance protection, you can trade moving average strategies with more confidence and safety.
Trading with Moving Averages on MultiBank Group Platforms
Moving averages are only as useful as the tools you have to apply them. With MultiBank Group, traders can use moving averages easily on MT4, MT5, and the MultiBank App, while benefiting from industry-leading trading conditions.
Built-in Indicators and Customization
All MultiBank platforms come with moving averages pre-installed. You can choose between simple, exponential, or other types, adjust the period length, and overlay multiple averages on your chart. This makes it easy to test different strategies, such as crossovers or trend-following.
Chart-based Trading
You can set stop-loss and take-profit levels directly on your chart at moving average levels. This allows you to combine technical analysis with disciplined trade management.
Real-time Alerts
Set price alerts when markets approach your chosen moving averages. This helps you avoid missing setups and prevents the need to monitor charts constantly.
Advanced Order Execution
With spreads from 0.0 pips, pure ECN pricing, and ultra-fast execution, your moving average strategies are supported by transparent conditions. Orders are filled without requotes, so your trades execute where you expect them to.
Secure and Regulated Environment
MultiBank Group is licensed by 17+ regulators worldwide and provides up to $1 million insurance coverage underwritten by Lloyd’s of London, along with segregated client funds and negative balance protection. You can focus on your trading with full peace of mind.
Diverse Markets to apply Moving Averages
Whether you trade forex, metals, indices, shares, or commodities, you can apply moving average strategies across more than 20,000 instruments from a single account.
With MultiBank Group’s platforms, moving averages are more than just lines on a chart, they become part of a disciplined, well-supported trading approach.
Ready to incorporate moving averages into your trading strategy? Sign up for an account now!
Frequently Asked Questions (FAQs)
1. What is a moving average in trading?
A moving average is a line that shows the average price of an asset over a chosen period. It helps traders identify trends, filter out noise, and spot dynamic support or resistance levels.
2. What’s the difference between SMA and EMA?
The Simple Moving Average (SMA) gives equal weight to all past prices, making it smoother but slower. The Exponential Moving Average (EMA) gives more weight to recent prices, making it more responsive but prone to false signals in choppy markets.
3. Which moving averages are best for beginners?
Beginners often use a 50-day SMA for identifying the broader trend and a 20-day EMA for quicker signals. Pairing a short-term EMA with a long-term SMA can provide both momentum and context.
4. How do traders use moving averages?
They use them to identify trend direction, act as support or resistance, and generate buy/sell signals through crossovers. Many combine them with tools like RSI or MACD for confirmation.
5. What is the Golden Cross and Death Cross?
A Golden Cross occurs when a shorter moving average (like the 50-SMA) crosses above a longer one (200-SMA), signaling bullish momentum. A Death Cross is the opposite, signaling bearish momentum.
6. What are common mistakes when using moving averages?
Mistakes include using too many moving averages at once, relying on them without confirmation from other tools, choosing the wrong length for your trading style, and ignoring larger timeframes.
