Moving Averages
Moving averages are the most fundamental and widely used technical indicators. They smooth out price data to help identify trends and potential support/resistance levels.
What Are Moving Averages?
A moving average calculates the average price over a specific period, then "moves" forward as new data comes in. This creates a smooth line that filters out short-term price noise, making trends easier to see.
Think of it like looking at a city from an airplane versus being on the street. The street view shows every detail (noise), while the aerial view reveals the overall layout (trend).
Types of Moving Averages
Kelor offers three types of moving averages, each with different characteristics:
1. Simple Moving Average (SMA)
What It Is
The SMA is the arithmetic average of prices over a specified period. It gives equal weight to all prices in the calculation.
How It's Calculated
SMA = (P1 + P2 + P3 + ... + Pn) / n
Where:
- P = Price (usually closing price)
- n = Number of periods
Example: A 10-day SMA adds the last 10 closing prices and divides by 10.
When to Use It
- Best for: Identifying long-term trends and major support/resistance levels
- Timeframe: Works well for swing trading and position trading
- Strength: Smooth, reliable, easy to understand
- Weakness: Slower to react to recent price changes
Common Periods
- 20-day SMA — Short-term trend
- 50-day SMA — Medium-term trend
- 200-day SMA — Long-term trend (very popular in stock and crypto markets)
Trading Signals
Trend Direction:
- Price above SMA = Uptrend (bullish)
- Price below SMA = Downtrend (bearish)
Crossovers:
- Price crosses above SMA = Potential buy signal
- Price crosses below SMA = Potential sell signal
Support/Resistance:
- In uptrends, SMA often acts as support
- In downtrends, SMA often acts as resistance
2. Exponential Moving Average (EMA)
What It Is
The EMA gives more weight to recent prices, making it more responsive to current market conditions than the SMA.
How It's Different
While SMA treats all prices equally, EMA emphasizes recent data. This makes it react faster to price changes.
How It's Calculated
EMA = (Price × Multiplier) + (Previous EMA × (1 - Multiplier))
Multiplier = 2 / (Period + 1)
Example: A 10-period EMA gives approximately 18% weight to the most recent price.
When to Use It
- Best for: Day trading and swing trading where quick reactions matter
- Timeframe: Short to medium-term trading
- Strength: Responds quickly to price changes, catches trends early
- Weakness: More prone to false signals during choppy markets
Common Periods
- 12-day and 26-day EMA — Used in MACD calculation
- 9-day EMA — Popular for day trading
- 20-day EMA — Good balance of responsiveness and smoothness
- 50-day and 200-day EMA — Long-term trend indicators
Trading Signals
Same as SMA, but signals occur faster:
Trend Direction:
- Price above EMA = Uptrend
- Price below EMA = Downtrend
Crossovers:
- Price crosses above EMA = Earlier buy signal than SMA
- Price crosses below EMA = Earlier sell signal than SMA
Dynamic Support/Resistance:
- EMA adjusts faster to price action, providing more relevant support/resistance levels
3. Weighted Moving Average (WMA)
What It Is
The WMA assigns linearly increasing weights to more recent prices. It's a middle ground between SMA and EMA.
How It's Calculated
WMA = (P1 × 1 + P2 × 2 + P3 × 3 + ... + Pn × n) / (1 + 2 + 3 + ... + n)
Example: In a 5-period WMA:
- Most recent price gets weight of 5
- Second most recent gets weight of 4
- Third gets weight of 3
- And so on...
When to Use It
- Best for: Traders who want more responsiveness than SMA but less sensitivity than EMA
- Timeframe: Medium-term trading
- Strength: Balances smoothness with responsiveness
- Weakness: Less commonly used, so fewer traders watching the same levels
Trading Signals
Similar to SMA and EMA:
- Trend identification
- Crossover signals
- Support/resistance levels
WMA reacts faster than SMA but smoother than EMA.
Popular Moving Average Strategies
1. Single MA Strategy
Use one moving average to identify trend direction:
- Buy: When price crosses above the MA and stays above
- Sell: When price crosses below the MA and stays below
Best practice: Use 50-day or 200-day MA for reliability.
2. Dual MA Crossover (Golden Cross / Death Cross)
Use two moving averages of different periods:
- Golden Cross (Bullish): When short-term MA crosses above long-term MA
- Death Cross (Bearish): When short-term MA crosses below long-term MA
Popular combination: 50-day and 200-day MA
3. Triple MA Strategy
Use three MAs for confirmation:
- Fast MA (e.g., 10-day) — Signals early moves
- Medium MA (e.g., 20-day) — Confirms the trend
- Slow MA (e.g., 50-day) — Shows overall trend
Buy signal: When fast > medium > slow (all aligned upward)
4. MA as Dynamic Stop Loss
Place your stop-loss just below the MA in uptrends (or above in downtrends). As the MA moves, adjust your stop-loss accordingly.
Choosing the Right Period
The period you choose depends on your trading style:
| Trading Style | Recommended Periods |
|---|---|
| Day Trading | 9, 12, 20, 26 |
| Swing Trading | 20, 50, 100 |
| Position Trading | 50, 100, 200 |
Shorter periods = More signals, more noise, faster reactions
Longer periods = Fewer signals, smoother lines, more reliable trends
Common Mistakes to Avoid
1. Using MA in Ranging Markets
Moving averages work best in trending markets. In sideways/choppy markets, they generate many false signals.
Solution: Use oscillators (like RSI) to identify ranging markets before relying on MA signals.
2. Trading Every Crossover
Not every MA crossover is a strong signal. Many result in losses.
Solution: Wait for confirmation — additional indicators, volume increase, or price action patterns.
3. Using Only One MA
A single MA provides limited information.
Solution: Combine with other indicators or use multiple MAs for confirmation.
4. Ignoring Market Context
MAs perform differently in different market conditions.
Solution: Understand whether the market is trending or ranging before applying MA strategies.
Tips for Success
- Start simple — Master one or two MAs before adding complexity
- Match the timeframe — Use shorter MAs for shorter timeframes
- Combine with volume — Strong MA crossovers usually come with volume spikes
- Be patient — Wait for confirmation rather than jumping on every signal
- Backtest — Always test your MA strategy on historical data before going live
Which Moving Average Should You Use?
Here's a quick guide:
- Choose SMA if: You want simplicity, trade longer timeframes, or seek major support/resistance levels
- Choose EMA if: You day trade, want early signals, or need quick reaction to price changes
- Choose WMA if: You want a balance between SMA smoothness and EMA responsiveness
Most traders start with SMA for its simplicity, then experiment with EMA as they gain experience.
Next Steps
Now that you understand moving averages, you can:
- Try them in backtesting — Test different MA periods with your favorite trading pair
- Combine with other indicators — Moving averages work great with RSI, MACD, or volume indicators
- Build your first strategy — Create a simple dual MA crossover strategy in Kelor's drag-and-drop interface
Moving averages are just the beginning. In the next section, we'll explore momentum oscillators that help identify overbought and oversold conditions.