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3 Hidden Secrets of the Moving Average

by TradingStrategyGuides | Last updated Jun 21, 2021 | All Strategies, Forex

Strategies, Indicator Strategies, Indicators, Trading Survival Skills | 10 comments

This article provides an overview of how every trader should use moving
averages to improve and accelerate trading. Therefore, this article offers the
3 hidden secrets of the moving average in forex. Let us know if we missed
one!

The moving average is a great indicator, primarily because of its simplicity. It is

also due to its ability to produce various types of analysis. The combination of
simplicity and depth along with other characteristics, such as consistency
(calculated the same way) and dynamics (moves along with price), make it a win-

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 win for all traders.

The best moving average setting has great value in understanding the following
scenarios:

Whether there is a trend in play – In a trending environment price and various

moving averages are aligned.
When there is a retracement or reversal occurring – In a retracement/reversal
scenario price is headed back to the average.
Where there is a lack of a trend – In a range mode, the (long-term) moving
averages are flat or close to flat.

But there are more (hidden) advantages to them!

Before we dive into it, let’s discuss the criticism which is regularly given to
moving averages.

Traders usually point to the fact that moving averages are lagging. Therefore, it
is not a worthwhile indicator. Nobody can dispute the fact that they are lagging.
It is a costly miscalculation if a trader discards moving averages as a viable
indicator.

By using the 3 hidden secrets of the moving averages together, with multiple
time frame analysis, a trader can greatly benefit from moving averages as an
indicator.

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 Table of Contents [ hide ]

1 How Moving Average Works

2 How Moving Average is Calculated
3 How Moving Average Serve as Forecast?
4 Hidden secret # 1: Great reversal / retracement targets and
divergence
5 Hidden secret # 2: the dynamics of gravity and speed
6 Hidden secret # 3: EMA’s = Quick Sand or S&R
7 Moving Average FAQ
8 Is moving average a good indicator?
9 Which moving average is best?
10 Which moving average to use?
11 Which moving average to use for day trading?
12 Which moving average is best for long term?
13 Which moving average to use for swing trading?
14 Which moving average is best for scalping?
15 Which moving average is best for 5 min chart?
16 Final Words - Moving Average Trading

How Moving Average Works

Most traders use moving average to determine trend and potential support and
resistance levels. As we know we use moving average to smooth data and have
a better view of the market trend that is in play.

Most of us use specific price data, like 20, 50, or 100 periods or any time period
that suits a particular trading style. But, since it’s based on past price data, the
moving average is a lagging indicator.

Both leading and lagging indicators have their own merits.

In this regard, the moving average is viewed as a great trend-following indicator.

You can learn more about leading and lagging indicators here: Best
Combination of Technical Indicators.

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 Trading using moving average works better in trading markets as opposed to
the ranging market. In a ranging market, the price has the tendency to cross a
moving average above and below over and over again.

Also, if you’re using moving average crossovers to enter trades you’ll experience
a lot of false signals in a ranging market.

Here is an example:

So, the key takeaway is to try to use the moving average in a trending market.

Moving on…

Let’s have a closer look at how is a simple moving average calculated.

See below:

How Moving Average is Calculated

The moving average is calculated by averaging the closing prices of securities
over a certain period. Moving averages can use as input any of the open, high
low and close prices (OHLC prices). However, most traders prefer applying the
moving average to a bar’s close price.

Here is the moving average formula:

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 To better understand how a moving average gets printed you’re your price
chart, we’ll go over an example.

Let’s suppose, a security be it a stock, a currency pair or a cryptocurrency posts

the following closing prices:

If you’re a day trader you’ll probably be using a short-term moving average like
the 5-periods moving average.

We can calculate the value of the 5 MA at day 10 as being 31.6.

SMA = ($23+$30+$34+$33+$38)/5= 31.6

We simply took the previous 5 closing prices and smoothed out the price by
finding the average of those prices.

Now, if you’re using a 10-periods moving average, we need to use the closing
prices from the previous 10 candles.

SMA= ($20+$22+$17+$18+$25+$23+$30+$34+$33+$38)/5=26

So, the current value of the 10-periods MA is 26.

By comparison, the price is closer to the 5-periods MA ($31.6) versus 10-periods

MA ($26). This makes sense because the short-term moving average follows the
most recent prices whereas the 10-periods MA takes into account prices from
further back.

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 Comparing simple moving average vs exponential moving average, the EMA
calculation is a little bit more complex.

Here is the formula for the exponential moving average:

Moving on…

Let’s explore the different ways to use moving averages.

See below:

How Moving Average Serve as Forecast?

There are several moving average strategies that can help traders make more
sense of the price action. Without further ado, the moving average is useful in
identifying:

The direction of the trend

Support and resistance levels
A shift in the trend direction
A place to hide your trailing stop-loss order
Mean reversion levels

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 The best way to figure out which moving average strategy is best for you is to
try to experiment with them all until you find one that fits your trading style.

Using moving averages in combination with other strategies can help you make
a better prediction. As an example, the moving average and stochastic strategy
work great together when you try to navigate the ups and downswings in the
price.

Moving on...

We'll share with you the promised 3 secrets that can help you transform your
trading.

See below:

Hidden secret # 1: Great reversal / retracement

targets and divergence
Moving averages are perfect targets when divergence occurs!

As price builds on a trend with either higher highs and lows OR lower lows and
highs, the trend eventually reaches exhaustion. This is due to the momentum
fading away with each subsequent newer higher or low.

Read more about the divergence definition, divergence example, and its uses.

The interesting point is: did you have a particular target in mind when viewing
divergence? (For reversal traders this could take profit place, for trend traders
this translates into how long the filter is valid).

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 The hidden secret is that on average – when divergence appears – a trader can
expect the price to retrace at minimum back to an intermediate moving average
(anywhere between 100 and 150 ema).

Obviously, it’s possible that the price can sometimes miss the moving average
band. But only if the price hits or comes close to these moving averages can a
trader consider the divergence to be irrelevant for future price movements.

Hidden secret # 2: the dynamics of gravity and

speed
Not everyone is a big fan of physics, and I am one of them as it's tough
material????

However, gravity is a concept that has a simple effect on our lives.

We stick to our planet Earth because of it.

Price and moving averages have a similar relationship to each other as humans
have with the Earth. Here is my modest explanation of physics. As humans gain
speed, we can temporarily jump away from the planet despite the effects of
gravity. When we lose speed, gravity pulls us back to the Earth. The more speed
we have, the further and higher we can jump. The great basketball legend
Michael Jordan is the best example.

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 The same can be said about price and moving averages.

When the price has more momentum (speed), it is able to travel more distance
away from moving averages before being pulled back due to the moving
averages and gravity kicks in. When the price has a little momentum, it is unable
to go far before the gravity of the moving averages pulls it back to its average.

The angle of 2 faster-paced moving averages and the difference between them
will indicate whether the price has sufficient speed to break away from its
average.

The best moving averages for momentum readings are ones between 5 and a
maximum of 40 ema. A trader could choose 5 and 10 EMA for instance, or 10
and 20 EMA or 20 and 40 EMA closes. The gap between the 2 ema’s will indicate
the momentum and hence speed of price.

Our SMI momentum indicator would do the same of course, but with less effort
on your side.

Hidden secret # 3: EMA’s = Quick Sand or S&R

The hidden secret # 2 part discusses the speed part of the equation.

This section focuses on the gravity part.

How does a Forex trader know whether gravity is in play and how strong it is?

The answer is simple: check the angle of the moving averages.

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 In this case, intermediate moving averages are in fact the best for the
representation of gravity. Anything between 30 and +/-80-100 ema would do
well.

If the moving averages are FLAT, and they have NO angle moving averages, they
have a very high gravity pull. The price will have a lot of problems trying to move
away from the average.

If the moving averages are ANGLED, and they are NOT flat moving averages,
they have a very low gravity pull. The price will succeed quicker in trying to move
away from the average. The moving averages, in fact, turn into dynamic support
and resistance. When the price does get back to them, it can use these levels as
a rough area for trend continuation (bouncing area due to Support and
Resistance).

Here is a strategy you can read about and it's called the risk to reward ratio.

Moving Average FAQ

Is moving average a good indicator?

Yes, moving average is a good technical indicator because it smooths out the
price data and gives you a clear view of the trend without the noise. Moving
average strategies are extremely popular tools used to identify long and short-
term market trends.

Which moving average is best?

The best moving average is the 200, 100, 50 and 20-periods moving average.
Other popular combinations of moving averages include 50 and 100 MA, 50 and
200 MA, 10 and 20 EMA.

Which moving average to use?

If you’re a short-term trader you should use moving averages with 5 to 20
periods. If you’re a swing trader, you should use the moving average with 20 to
80 periods. But, if you’re a long-term trader, you should use the moving average
with 100 to 250 periods.

Which moving average to use for day trading?

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 The best moving average for day trading is the 5, 8 and 13 periods MAs. These
are fast-paced moving average suited for day traders seeking to buy and sell
signals across all intraday time frames.

Which moving average is best for long term?

The best moving average for long term traders is the 200-day exponential
moving average. The 200-day EMA is regarded as the most important
barometer of whether securities are in an uptrend or a downtrend.

Which moving average to use for swing

trading?
The best moving average for swing trading is the 20-periods MA. The 20-day
moving average has been the tool of choice helping swing traders to gauge the
direction of the trend.

Which moving average is best for scalping?

The best moving average for scalping is the 5 and 8-periods MAs. The 5 moving
average adds more reliability to your day trading strategy. This is a very fast-
moving average that is very sensitive to short-term changes in price.

Which moving average is best for 5 min chart?

The best moving average for the 5-minute chart is the 12-period MA. The 12-MA
would average out the closing prices for the last 12 candles, which sums up 1-
hour of trading activity.

Final Words - Moving Average

Trading
For some of you, the “3 hidden secrets of the moving average” are known. For
others, it may be new. Irrespective of that, what do you think of the above
concepts and what are your experiences in trading?

Our team at Trading Strategy Guides want to provide the best content for your
Forex trading and appreciate any and all feedback.

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 By the way, next time we will continue with our moving average discussion and
explain how we can use the indicators on multiple frame analysis!

Thank you for reading!

Please share your comments on additional ways to use moving averages that
we did not mention or leave a comment below if you have any questions on
using moving averages!

Also, please give this secret a 5 star if you enjoyed it!

(33 votes, average: 4.27 out of 5)

! " # $

TradingStrategyGuides

Author at Trading Strategy Guides | Website

With over 50+ years of combined trading experience, Trading Strategy

Guides offers trading guides and resources to educate traders in all walks
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10 comments
Newest comments first

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 Comments are closed

Kris

November 13, 2020

This didn't define what a "flat" moving average actually is.

Thanks for the info though.

TradingStrategyGuides

February 12, 2021

A flat moving average is basically where there isn't much

movement and you have a lack of a trend. Not trending up or
down. Hope that helps.

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 understanding moving averages clearly is very
important for traders.This information does not
only apply to the standard moving average, but to
most of the indicators that utalise a moving
average in their execution

September 18, 2020

I have beem

holy josiah

September 10, 2020

Quite an insightful write-up

TradingStrategyGuides

February 16, 2021

Thank you!

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 0

Marco

August 19, 2020

Todavia hay mas sobre el uso de las medias móviles:

1.-Cuando sabemos que entramos , estamos y salimos de de
un rango lateral:medias móviles entre cruzadas entre si , si
son de bajos periodos moviles (10-20) y serán planas , si son
de altos periodos.(150-300)
2.-También sobre el cruce de medias a la baja o al alza.
3.-Confluencia de medias móviles con soportes y
resistencias.

Osagie

August 10, 2020

Thanks for explaining the EMA in details ,I really appreciate

your effort .thanks

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 0

Hadi Fakhraeeyan

April 19, 2020

it was wonderfull
thanks

roby

March 9, 2020

great insight.

jitender gehlawat

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 May 30, 2014

Great really its helpful

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