How markets workUpdated 3 min readBy the FXNOD team
How do moving averages work in trading?
A moving average is the average closing price over a set number of recent periods, recalculated as each new period closes. It smooths the price into a line that shows the trend. A rising line with the price above it suggests an uptrend. Moving averages lag: they describe what has happened and do not predict what comes next.
How it is calculated
A 10-period simple moving average adds the last ten closing prices and divides by ten. When a new candle closes, the oldest price drops out and the newest comes in. The line moves because the window moves.
Simple and exponential
| Simple (SMA) | Exponential (EMA) | |
|---|---|---|
| Weighting | Every period counts equally | Recent periods count more |
| Reaction to new prices | Slower | Faster |
| Smoothness | Smoother, fewer false turns | More responsive, more false turns |
| Often used for | Long-term trend, such as 200 periods | Short-term trend, such as 9 or 21 periods |
Common settings
- 9 to 21 periods: short-term direction.
- 50 periods: the medium-term trend.
- 200 periods: the long-term trend. On a daily chart, many investors treat it as the line between a bull and a bear market.
No setting is correct. The popular ones are useful mainly because many people watch them.
Four ways traders use them
Trend filter
Take only buy trades while the price is above a long average, and only sell trades below it.
Crossover
A fast average crossing above a slow one is read as a buy signal, and below as a sell signal. The 50 crossing the 200 is known as the golden cross and the death cross.
Dynamic support and resistance
In a steady trend the price often pulls back to an average and continues.
Slope
A flat average says there is no trend, whatever the price is doing around it.
Where they fail
In a sideways market the price crosses the average again and again, and a crossover system loses on each one. This is called a whipsaw. Moving averages also turn late, so a crossover system gives back part of every trend at the start and at the end. They are trend tools and should be switched off, or ignored, when there is no trend.
In FXNOD
Trade Pilot's chart can draw moving averages, and Bot Forge can use a simple or exponential moving average as an indicator that decides which side a bot takes. An indicator needs enough history to produce a value, so a bot waits until it has one.
Questions people ask
- Which is better, SMA or EMA?
- Neither. The EMA reacts faster and gives more false signals. The SMA is smoother and later. Choose by whether you fear being late or being wrong more.
- What is the best moving average period?
- There is no best one. Shorter periods follow the price closely; longer ones show the bigger trend. 20, 50 and 200 are the most watched.
- Do moving average crossovers work?
- They catch large trends and lose repeatedly in sideways markets. The result depends on how much the market trends, and they work better as a filter than as a complete system.
- Do moving averages work on synthetic indices?
- They draw correctly, but because each move on a synthetic index is random, the line carries no information about the next move.
Watch it on a live chart
Open Trade Pilot with your Deriv demo account, pick a market, and see how the price behaves tick by tick, with virtual funds.
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