Moving Average Trading from Beginner to Expert: All the Tips You Need to Know

Want to use moving averages for trading but always feel confused? Don’t worry, today we’ll start from scratch and clarify the most commonly used indicator in this market.

What is a Moving Average? What does this indicator actually do?

A moving average (MA) simply sums up the closing prices over a certain period and then divides by the number of days. The formula is straightforward: N-day MA = Sum of closing prices over N days ÷ N

For example, a 5-day MA is the average of the closing prices of the most recent 5 trading days. Each trading day, this line shifts forward by one unit, calculating a new average, and connecting these points forms the “line” we see.

The core functions of moving averages are twofold:

First, to help you identify short-term, medium-term, and long-term price trend directions; second, by observing the arrangement patterns of different period MAs, to determine whether the current market is bullish or bearish, thus finding relatively reliable buy and sell points.

But to be honest—moving averages are just auxiliary tools; don’t rely on them excessively. The smartest approach is to combine them with other technical indicators.

What types of moving averages are there? What are their differences?

Based on calculation methods, moving averages are mainly divided into three types:

1. Simple Moving Average (SMA)

This is the most basic, using the arithmetic mean. The calculation formula you already know: N-day MA = Sum of closing prices over N days ÷ N.

For example, to calculate the 10-day MA, add up the closing prices of the last 10 days and divide by 10. This method is the most intuitive and easiest to understand.

2. Weighted Moving Average (WMA)

This method upgrades the SMA by giving greater weight to recent prices. Simply put, the most recent closing price has the greatest influence, with influence decreasing as you go further back.

3. Exponential Moving Average (EMA)

This is a bit more complex, but its principle is similar to WMA—giving more weight to recent prices. The difference is that EMA uses an exponential weighting method, making it more responsive to price fluctuations and quicker to detect trend reversals.

Comparison:

Compared to SMA, WMA and EMA place more emphasis on recent price changes. If prices are very volatile, EMA and WMA react more sensitively to these changes. That’s why short-term traders often prefer EMA—it helps quickly catch market shifts.

How many days should the moving average be? How to distinguish short-term, medium-term, and long-term?

Depending on the time cycle, moving averages are categorized as follows:

5-day MA (weekly): Reflects the average price over the past week. If the 5-day MA is above the 20-day and 60-day MAs, and all are rising, it indicates a typical bullish trend, and the stock price may continue to rise.

10-day MA: An important reference for short-term trading, very sensitive to recent price fluctuations.

20-day MA (monthly): Reflects the price trend over a month. This is a key level that short-term and medium-term investors focus on.

60-day MA (quarterly): A good tool for mid-term trading, showing more medium-term trends.

240-day MA (annual): Used to judge long-term trends. When short-term MAs fall below the annual MA, it often signals a bearish trend.

Important reminder: MAs are inherently lagging indicators—they reflect past prices, not current or future prices. So, short-term MAs are more sensitive but less accurate for prediction; long-term MAs are slower but tend to give more reliable trend forecasts.

How to use moving averages? Four practical techniques

Technique 1: Judging the overall direction through MA arrangement

Bullish alignment: Short-term MA above medium-term MA, which is above long-term MA, all trending upward. This suggests a higher probability of buying.

Bearish alignment: The opposite—short-term MA below long-term MA, all trending downward. This is a sell signal.

Consolidation phase: MAs are mixed and crossing each other. In this case, the market lacks a clear direction, and it’s better to wait.

Technique 2: Look for Golden Crosses and Death Crosses

This is the most classic MA trading signal:

Golden Cross: Short-term MA crosses above long-term MA from below. This is usually a buy signal, indicating potential upward momentum.

Death Cross: Short-term MA crosses below long-term MA from above. This is usually a sell signal, indicating potential downward movement.

In practice, many traders wait for the short-term MA to cross two or three long-term MAs, making the signal more reliable.

Technique 3: Combine with other indicators

Using MAs alone can be risky because they react slowly. The smartest approach is to combine MAs with oscillators like RSI, MACD, etc.

For example: If RSI has entered oversold territory (price makes new lows but indicator doesn’t), and MAs are flattening or turning, it might be a good opportunity for a reversal.

Technique 4: Use MAs to set stop-loss levels

Many professional traders use MAs as stop-loss points. For example:

• Long positions: If the price falls below the recent 10-day or 20-day low and also drops below the 10-day MA, exit.

• Short positions: If the price rises above the recent 10-day or 20-day high and also moves above the 10-day MA, exit.

This method is fully objective, requiring no subjective judgment, and helps avoid human emotional biases.

Pitfalls of moving averages: You must know their limitations

After discussing their advantages, let’s honestly look at the drawbacks:

1. Severe lagging

MAs are based on past prices, so they always react slowly to current market conditions. The longer the period, the more pronounced this issue. For example, the 100-day MA includes data from the past 100 days and ignores recent two days’ sharp moves, while the 5-day MA reacts immediately.

2. Cannot predict future prices

Past price movements do not equal future trends. MAs can help identify established trends but cannot forecast what’s coming.

3. Fail in sideways markets

When the market is range-bound and oscillating within a zone, MA signals can mislead you.

Final advice

There’s no perfect indicator—only an ever-improving trading system. The best practice is to:

• Use a combination of 3-5 MAs with different periods
• Combine with candlestick patterns, volume, RSI, MACD, and other indicators for comprehensive analysis
• Strictly follow risk management and stop-loss rules
• Continuously adjust and optimize parameters based on real trading experience

Remember: MAs are just one tool in your toolbox. Learn to use it well, but don’t let it control you.