Moving Average: A Proven Profitable Trend Following Strategy

What is a Moving Average?

Moving Average (MA) is a technical indicator that calculates the average price over a certain time period. By "smoothing" short-term price fluctuations, MAs help traders identify the true trend direction behind everyday market noise.

The moving average is a lagging indicator — it confirms existing trends, not predicts new ones. This is not a weakness, but a strength: MA provides a more reliable signal even with a slight delay.

Types of Moving Averages

Simple Moving Average (SMA)

SMA is the arithmetic average of closing prices in a certain period. The formula is simple: the sum of all closing prices divided by the number of periods.

SMA 20 example: Add up the closing prices of the last 20 candles, then divide by 20. Each time a new candle is formed, the price of the oldest candle is removed and replaced by the newest price.

Advantages of SMA: Smoother and more stable, good for spotting long-term trends.
Disadvantages of SMA: Slow to respond to price changes — can give signals too late.

Exponential Moving Average (EMA)

EMA gives greater weight to the latest prices, so it is more responsive to price movements. The EMA formula uses a multiplier: 2 ÷ (period + 1).

Advantages of EMA: Responds more quickly to price changes, signals earlier.
Disadvantages of EMA: More sensitive to false signals.

Weighted Moving Average (WMA)

WMA assigns a linear weight that increases to recent prices. The most recent price gets the highest weight, the oldest price gets the lowest weight. WMA is between SMA and EMA in terms of responsiveness.

Hull Moving Average (HMA)

Developed by Alan Hull to significantly reduce lag while maintaining smoothness. HMA uses WMA with a special formula that produces lines that have almost no lag.

Most Popular MA Settings

The following are the MA settings most widely used by professional traders:

• MA 20 — Short-term trend, popular among swing traders


• MA 50 — Medium-term trend, watched by large institutions


• MA 100 — Strong long-term support/resistance


• MA 200 — "The Holy Grail of MA" — the divider between bullish and bearish markets


• EMA 9 & EMA 21 — Favorite combination of short-term traders


• EMA 12 & EMA 26 — The basis of the MACD indicator

Golden Cross and Death Cross Strategy

Golden Cross (Buy Signal)

Golden Cross occurs when the short period MA (usually MA 50) crosses the long period MA (MA 200) from bottom to top. This is one of the most powerful bullish signals in technical analysis, often marking the start of a long-term bull market.

How to trade Golden Cross:

1. Wait for the 50 MA to cross the 200 MA from below


2. Confirm with increasing volume


3. Entry buy when the price pulls back to MA 50


4. Stop loss below MA 200


5. Target at least 2-3x stop loss distance

Death Cross (Sell Signal)

Death Cross is the opposite of the Golden Cross — the 50 MA cuts the 200 MA from top to bottom. A strong bearish signal that often precedes a significant price decline. Institutional traders pay close attention to this level.

MA as Dynamic Support and Resistance

One of the most valuable uses of MA is as a moving (dynamic) support and resistance level. In a strong uptrend, price often “bounces” off the 20MA or 50MA before continuing upwards. On the other hand, in a downtrend, the MA becomes resistance that is difficult to penetrate.

Price Action + MA Technique: Look for an area where the price touches an important MA (20, 50, 200), then enter a position when a candlestick reversal pattern is formed at that level. This combination produces excellent risk/reward.

Dual Moving Average Crossover Strategy

Using two MAs with different periods to get a crossover signal:

• Aggressive: EMA 9 and EMA 21 — more signals, more false signals


• Moderate: EMA 20 and EMA 50 — balance between signal and accuracy


• Conservative: SMA 50 and SMA 200 — fewer signals but more reliable

Basic rule: buy when the short MA crosses the long MA from below (bullish crossover), sell/short when the short MA crosses from above (bearish crossover).

Triple MA System: Powerful Trend Filter

The three MA system (e.g. EMA 8, EMA 21, EMA 55) provides an additional layer of confirmation:

• Three MAs in sequence (8 > 21 > 55) = strong uptrend → only look for longs


• The three MAs are in reverse sequence (8 < 21 < 55) = strong downtrend → only look for shorts


• MA coincides with each other = sideways market → avoid trading or reduce position size

Disadvantages of Moving Averages and How to Overcome Them

Lag: MA is inherently lagging. Solution: use EMA with a shorter period, or combine it with a leading indicator such as RSI for better timing.

False Signals in Ranging Markets: In sideways conditions, MA will give many false signals (whipsaw). Solution: add a filter like ADX to confirm that the market is trending before using the MA signal.

One Size Fits All: The ideal MA setting varies between instruments and time frames. Solution: always backtest your MA settings on the currency pair and time frame you use.

Conclusion

Moving averages are one of the most versatile and reliable indicators in a trader's toolkit. Its strength lies in its simplicity — easy to understand but capable of providing deep insight into market conditions. Start with the 20, 50, and 200 MA, understand how they work in depth, then develop a strategy that suits your trading style.