How to use moving averages

SMA or EMA

Short-term traders often prefer the EMA and trend followers the SMA. Neither is correct by default; what matters is sticking with one setting long enough to learn how it behaves.

Choosing the period

Common short periods are 5, 10 and 20; medium 50 or 75; long 100 or 200. Japanese stock charts favour 25 and 75, while many international traders watch 20, 50 and 200. The more traders watch a line, the more orders gather around it.

Reading the line

• Slope: rising means an uptrend, falling a downtrend, flat a range.
• Price position: above the line buyers lead; below it sellers lead.
• Pullbacks: in a trend, price dipping back to the line and bouncing is a possible entry.

Golden cross and death cross

A short average crossing above a long one is a golden cross; crossing below is a death cross. The signal is easy to read but always late, because it is built from averages. In ranges the lines cross again and again and most signals fail.

The stacked trend ("perfect order")

When short, medium and long averages are stacked in order and all point the same way, Japanese traders call it a perfect order. On a 1-hour chart with the 20 EMA above the 50 EMA above the 200 EMA, all rising, the trend is strong; many traders then only look for pullback buys.

Adding it in MT4 or MT5

1. Insert, Indicators, Trend, Moving Average.
2. Set the period, method (Simple or Exponential) and apply to Close.
3. Give each period its own colour so the order is obvious.

Fewer false signals

• Trade in the direction of the higher timeframe's average.
• Step aside when the line is flat.
• Place stops beyond the recent swing high or low, not just past the line.

To measure momentum as well, pair it with MACD or RSI.