What Is the Moving Average Indicator?

The moving average is one of the most widely traded and used technical indicators, since many traders rely on it for its simplicity, ease of use, and reliability. This article covers the indicator and how it’s used in market analysis. The moving average is a trend-following indicator built around an average price, which reduces the negative effects of short-term market volatility on prices.

Indicator Types

There are a few basic forms of the moving average, and they’re all easy to use in MetaTrader. As a trader, you should understand the core idea behind each form.

• Investors commonly use the version that averages the closing price over a set period, giving every price equal weight. For example, with a 10-period moving average, you add up the last ten closing prices and divide by 10; each time a new closing price comes in, the oldest one drops out of the calculation.
• The linear (weighted) and exponential moving averages are similar to each other. Both give more weight to the most recent prices, which reflects price movement more responsively and produces signals faster. Be careful here, though — some of these signals can turn out to be false.
• The simple moving average works largely as its name suggests. Of the three forms, it follows price fluctuations most closely, which is why it’s considered the strongest for identifying the trend.

How to Set It Up

Many readers and traders assume the moving average has to be downloaded separately for MetaTrader, but it’s already built into the platform. Just click Insert, then Trend, and the moving average indicator appears. Setting it up with the right parameters matters a great deal.

The period is the number of candles the calculation looks at. A longer period makes the line smoother and the signals steadier, while a shorter period keeps the indicator closer to price.

There’s no fixed rule for the “right” period for this indicator. When analyzing higher-timeframe charts, investors tend to prefer moving averages in the 50-to-200 range, while for shorter-term trading they typically prefer a period closer to 12.

You can apply the indicator to several price options — close, open, low, median, high, and typical price. Despite all these options, most investors prefer the close price, and many also use a shift setting to move the indicator forward or backward, which raises or lowers the moving average line.

How to Use the Moving Average in Trading

One thing to understand is that the moving average produces lagging signals, since it’s calculated from the latest closing prices. It’s also a trend indicator, so it can help you read the day-to-day direction — up or down — and crossovers work well for this.

Golden Cross

When the shorter-period moving average crosses above the longer-period one, from below to above, this is considered an important signal for a buy.

Death Cross

When the shorter-period moving average crosses below the longer-period one, from above to below, this is considered a strong signal for a sell. More broadly, when the indicator line is heading down, it points to a downtrend, and when it’s heading up, it points to an uptrend.

The moving average is also widely used to mark support and resistance levels, and how significant those levels are depends on the indicator’s period — the longer the period, the more significant the support or resistance level tends to be, which makes the time factor important. Naturally, the longer the period, the higher and larger the indicator line sits.

When moving averages are used as support and resistance levels, this can help traders set levels to plan their entries and exits. When price breaks above the moving average, this is read as a signal to buy; the reverse also applies — a break below is read as a signal to sell. If price touches the moving average line repeatedly, this can point to a reversal being close.

One advantage of the moving average is that it isn’t used in isolation — several other indicators on the platform build on it. The most widespread of these is MACD, and it’s also common to combine the moving average with other trading signals such as Bollinger Bands and Alligator. Every investor should keep in mind that no single indicator works well in every situation and for every style, which is why combining signals for stronger confirmation matters.

It also helps to combine candlestick patterns with moving averages, since this can produce a stronger signal pointing to a reversal or a continuation of the trend. Keep in mind that you generally want at least two matching signals before acting on a trade.

Conclusion

To bring everything together in a couple of lines: the moving average is a technical trend indicator that tracks price movement and produces signals that lag a little but tend to be reliable. The general approach traders follow: look to buy when price is above the moving average — a golden cross — and look to sell when price drops below it, at a death cross.

The moving average is also widely used in technical analysis. It’s calculated to smooth an asset’s price data by producing a continuously updated average price.

Using the moving average reduces the effect of short-term random price swings on an asset’s price over a set timeframe. Some key points to keep in mind when using it:

• The moving average is commonly used in technical analysis.
• It’s calculated to smooth an asset’s price data over a set period by creating a continuously updated average price.
• It’s a calculation that takes the arithmetic mean of a set of prices over a specific number of past days — for example, the last 15, 30, 100, or 200 days.
• The exponential moving average gives more weight to an asset’s price in the most recent days, which makes it more responsive to new information.

Frequently Asked Questions

What does “moving average” mean?

Moving average is a value calculated from the average price movement over a set number of periods.

What are moving averages?

Moving averages are readings that express the average change in price over a set number of periods. For example, a 20-period moving average reflects the price change over the last 20 periods, which could be days, hours, or minutes.

What’s the difference between the simple and exponential moving average?

The key difference between the simple moving average and the exponential moving average is that the exponential moving average (EMA) is more sensitive to price and its reading lags, while the simple moving average (SMA) is less sensitive to price and its reading stays close to price.

Related reading: Best MetaTrader Indicators; Parabolic SAR and Moving Average Strategy.

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