Home EDUCATION Moving Averages – What are They?
Moving Averages – What are They?

Moving Averages – What are They?


What Are Moving Averages – How Can They Help Us With Trading?

A moving average is an average of the price between one time frame and another, smoothened out over time. By taking the average closing price of a currency pair, over a number of periods, you will be finding out the “moving average”. By a period we mean the time frame of each candlestick.

How To Calculate a Simple Moving Average (SMA)

Let us suppose we are looking at a 1-hour chart. If we are looking at a 10 period simple moving average, all we have to do, is find the closing price of each candlestick, for the last 10 candlesticks. Add the price together and then divide by 10. If we are looking at plotting a 10 period simple moving average on a half hour, chart, we find the closing price of the last 10 candlesticks, add it up and divide by 10. Same principle would be true, if you are looking plotting a 30 period simple moving average. On a 1-hour chart, you pick the closing price of the last 30 candlesticks, add together and then divide by 30. The resulting price is average price.

If you are actually hand plotting the lines, you will find the price average of the previous 30 candlesticks and plot the average price on your chart. By linking the two prices, you get your moving average. Luckily today, all charting stations will give you the option to plot using their tools, so there is no need to calculate anything by hand. But this is the principle in general. If you plot very short time frames like 5 candlestick period, you are going to have a chart which is a lot less smooth than one which is a 30 period time frame.

Simple Moving Averages Uptrend

simple moving averages downtrend

Watch this video explaining what moving averages are.

Exponential Moving Average (EMA)

As the name indicates for SMA – the price configuration is “Simple” therefore price action can be determined by simple arithmetic. However, SMA’S can give rise to many spikes and zig-zags, which could affect our judgment in the way we use them. For example, if there is a spike due to a news release, than you may be seeing the price movement as a serrated tool. EMA’s or Exponential Moving Averages, give more weighting to the recent periods. The price is loaded heavier to the recent days, than the SMA. As such spikes, which could be very sharp with the SMA’s are now smoothened out by the EMA’S. As such the price represented by the EMA’s are more accurately represented in recent price action. It is a smoother line. EMA’s give more emphasis on the recent turn of events. This is important, because when you are trading, it is much more important to see what is happening NOW rather than just look at the past.

Simple Moving Average and Exponential Moving Average

One of the very good value of a simple moving average is finding a trend. In an uptrend you can see that the price action tends to happen above the moving average line plotted on the chart. Alternatively, when the price action is happening below the moving average line plotted on the chart, we are generally speaking looking at a downtrend. This is all fair and square. However the problem with looking at just one time frame, is that it is too simple.

As the name implies, with simple moving averages, they react according to price movements, within their time frame. But they are latent.

Let us imagine a situation, where we are looking and the EUR/USD. The price is generally on a downtrend, however, at noon there is a high impact news, which makes the Euro surge up against the Dollar. This is against the general trend, and is probably very temporary. If you can see how this affects the price of the moving average, you see that the average line is now cutting above the trend line. If you are not aware that there is a news update, you may think that this is an indication of a price change. But in fact, what this is actually is a “fake out”. After a short while, the price settles back to the slippery road of downhill.Getting faked out is not fun. It is easy to get caught in the cross-fire. So how can this problem be avoided, or at least decreased?

Fake Outs Moving Averages

One of the best solutions is to plot different time frames. Let us have a look at the same scenario but this time with 10 and 20 SMA’S. Naturally, the shorter time frame is much more reactive than the longer time frames. As such you will find that the 20-period SMA is a much smoother line than the 10-period SMA. Naturally you can add even more slow averages by putting a 30 or 60-period SMA. What has to be borne in mind is that the lines should be placed in order. Ideally use different colours to identify them. The movement is fastest to slowest in an uptrend, and slowest to fastest in a downtrend.

Moving Averages

Moving Average Cross Overs – Time to Trade

Moving averages are an excellent tool in fundamental analysis, to help you determine, when you are going to pick a trend change. The Cross-Over between different period SMA’S is a very significant signal. If moving averages cross over one another, it usually means that a trend is about to end, and this could be a perfect chance to take a trade in the opposite direction. Although, this is not a system which is infallible – the “cross-over” of different period SMA’s is a very strong indicator. Use this together with other indicators for price confirmation and you should be making some very positive trades. As with other indicators, the SMA’s work best in a trending or even volatile market. However, they are pretty useless in a ranging market. What will happen in a trending market, is that you will get plenty of cross-overs which do not mean anything much.

Moving Average Cross Over

Using Moving Averages as Support and Resistance Levels

Moving Averages can act as dynamic support and resistance lines. It is dynamic, because it is not the typical “top” and “bottom” lines that we have learnt to plot for the support and resistance. If we look at the chart below, we can see how the price bounced off the EMA (exponential moving average) on different occasions until the support turned into resistance.

Moving Averages as support and resistance levels

As with standard support and resistance, you will always get a few bars, which can dip into the support and resistance. Sadly there is no such thing as a perfect indicator. Again, using more than one SMA-period will provide a better picture in order to assess strategies.

Conclusion for Using Moving Averages

Moving Averages are a way in which price action can be smoothened out. Although there are different types of moving averages, the Simple and the Exponential are the most commonly used.

Exponential or EMA’s place more weighting to recent price movement.

Simple Moving Averages or SMA’s give a faithful rendition of price movement, but are susceptible to spiking.

Exponential averages can help you spot a trend faster, but it is also prone to fake outs.

  1. Spot Trends
  2. Used them as an Indicator when they “Cross Over”
  3. Used as Dynamic support and resistance levels.

Traders ought to experiment with different time frames and see what results each time frame gives them, in order to determine trading styles.

Tip of the Day:  Always Consult with the Economic Calendar  before trading to make sure that you do not fall into financial trouble, trading during high volatility.  Consider getting a FREE DEMO ACCOUNT to do practice trading – it’s easy to open, you just need to have email address and you will be granted 1000$ in your account as “fake money” so you can test your strategy.

Need more tips and tricks about trading binary?

the secret trader ebookIn conclusion, getting an education is your only key to successful trading. Take a little time and download your FREE COPY of the “Secret Trader” and learning how to trade successfully. If you have what it takes, you can make money trading binary options. If you want to purchase full ebook for only 19EUR head there straight away -> SHOP



Your email address will not be published. Required fields are marked *

I'm not a robot *

Information on should not be regarded as recommendations to Trade Binary Options. Trading Binary Options carried substantial risk of loss of capital. is not licensed nor authorized to provide advice on investing and related matters. Information on the pages of BinaryOptionSheriff are only guidelines and should not be treated as investment advice. Clients without a good knowledge of Binary Option trading should seek individual advice from an authorized source. Past performance is not a guarantee for future returns. does not accept any liability for any loss or damage as a result of reliance on the information contained within this website. This website is independent of the Binary Options Brokers and the Signal Software featured on it. Before trading with any of the brokers, or using Signal software, clients should make sure that they fully understand the risks and check and ensure that the broker of their choice is licensed and regulated. We recommend choosing an EU regulated broker if you reside within the European Union. US REGULATIONS IMPORTANT NOTICE. Binary Options Companies are not regulated within the US. These Companies are not supervised, connected or affiliated with any of the regulatory agencies such as the Commodity Futures Trading Commission (CFTC), National Futures Association (NFA), Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority 9FINRA). Please NOTE that any unregulated trading activity by U.S. Citizens is considered unlawful. Trade only at your own risk. CFTC rule 4.41: Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown. All information on this website are for educational purposes only and are not intended to provide financial advice. Any statements about profits or income, expressed or implied, do not represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. You accept full responsibilities for your actions, trades, profit or loss, and agree to hold Binary Option and any authorized distributors of this information harmless in any and all ways.

Translate »