MA Moving Average Complete Guide: From Basic Concepts to Trading Practice

1. What is the Moving Average?

The Moving Average (MA) is fundamentally about reflecting market trends by calculating the average price over a certain period. Specifically, MA is obtained by summing the closing prices within a specific cycle and then dividing by the number of days to get the arithmetic mean.

Basic formula: N-day MA = Sum of closing prices over N days ÷ N days

Over time, this average updates continuously, and connecting these data points forms the moving average line chart we see. For example, the 5-day MA is the average of the closing prices of the most recent 5 trading days.

The biggest advantage of MA is that it helps traders quickly identify short-term, medium-term, and long-term price directions. By observing the arrangement and shape of the moving averages, traders can judge trend directions and find buy or sell opportunities. However, it should be emphasized that MA is just one of many technical indicators and should not be overly relied upon; it needs to be combined with other tools for comprehensive analysis.

2. What types of Moving Averages are there?

Based on calculation methods, MA mainly falls into three categories:

1. Simple Moving Average (SMA)
Uses the most basic arithmetic mean method, with the most straightforward calculation, but less sensitive to recent prices.

2. Weighted Moving Average (WMA)
Builds on SMA by assigning different weights to prices at different times, with more recent prices given higher weights, making recent price changes more prominent.

3. Exponential Moving Average (EMA)
Uses exponential weighting, making it more sensitive to price fluctuations and faster at capturing trend reversal signals. Compared to SMA, EMA and WMA give greater importance to recent prices, making them more popular among short-term traders.

3. How is the Moving Average calculated?

SMA Calculation Method

The simplest MA is reflected in the calculation of SMA: N-day MA = Sum of closing prices over N days ÷ N. For example, a 10-day MA is obtained by summing the closing prices of the past 10 trading days and dividing by 10.

EMA Calculation Method

EMA is more complex. It starts with a simple average as the initial EMA, then calculates a weighting multiplier, and finally uses the current price, the multiplier, and the previous EMA value for calculation. Because EMA assigns greater weight to recent prices, it reacts more sensitively to price changes and can more quickly signal potential trend reversals.

Practical tip: Trading software automatically calculates these values, so traders do not need to do manual calculations—just understand the meaning and application of MA.

4. How to choose the appropriate MA for different time periods?

MA is divided into short-term, medium-term, and long-term categories, each suitable for different scenarios:

Short-term MAs

• 5-day MA (weekly): Reflects the price trend over the past week, an important indicator for very short-term trading
• 10-day MA: Used for short-term trading, highly sensitive

Medium-term MAs

• 20-day MA (monthly): Shows the average price within a month, key focus for short- and medium-term investors
• 60-day MA (quarterly): Reflects the trend over the past three months, a critical reference for medium-term trading

Long-term MAs

• 200-day MA: Represents long-term price levels
• 240-day MA (annual): Used to judge the long-term trend direction

Note that short-term MAs are more responsive but less accurate for prediction; long-term MAs are smoother and more reliable for trend prediction but slower to react. In actual trading, there is no absolute “optimal cycle.” Traders need to find a cycle that matches their trading style and complements the MA to achieve better results. Some use the 14-day MA (roughly two weeks), others use the 182-day MA (half a year). The key is to find a rhythm that suits oneself.

5. How to apply Moving Averages in trading?

1. Identifying Price Trends

Judging market direction based on MA position is the most basic application. When prices are above the short-term MA, it indicates a short-term bullish trend; when prices are above the long-term MA, it suggests a long-term positive outlook, and buying can be considered. Conversely, if prices are below MAs, selling might be appropriate.

Bullish alignment: Short-term MA above medium- and long-term MAs indicates a potential sustained upward trend.

Bearish alignment: Short-term MA below medium- and long-term MAs indicates a potential sustained downward trend.

Consolidation phase: When candlesticks fluctuate between short-term and long-term MAs, caution should be exercised in holding positions.

2. Using MA cross signals

After determining the overall trend, the best entry points can be identified by observing crossovers between different cycle MAs.

Golden Cross: Short-term MA crosses upward over long-term MA, indicating a potential rise and a buy signal.

Death Cross: Short-term MA crosses downward below long-term MA, indicating a potential fall and a sell signal.

3. Using other indicators in conjunction

The main drawback of MA is its lagging nature; the market may have already moved significantly before the MA reacts. Combining with leading indicators like RSI can compensate for this. When oscillators show divergence (price makes new highs but indicators do not), and MAs start flattening or turning sideways, it may be prudent to lock in profits or prepare for trend reversal entries.

4. Using MA as a reference for stop-loss

In Turtle Trading rules, MA is often combined with N-day high/low points as a stop-loss reference. In a bullish trend, if the price falls below the 10-day/20-day lows and is below the corresponding cycle MA, a stop-loss should be triggered; in a bearish trend, if the price breaks above the respective highs and is above the corresponding MA, a stop-loss should be triggered. This approach avoids subjective judgment, letting market prices serve as the standard.

6. Core limitations of Moving Averages

The fundamental issue with MA is lagging. It is based on past prices, not current prices, so it always lags behind the actual market movement. The longer the cycle, the more pronounced the lag—e.g., the 100-day MA reacts slowly to recent market changes and is less sensitive to short-term fluctuations than the 10-day MA, resulting in a smoother line.

For example, if an asset’s price surges 50% in two days, the 10-day MA will rise sharply, the 5-day MA even more steeply, but the 100-day MA will hardly change. This lag is progressive.

Additionally, any indicator is based on historical data and cannot fully predict the future, so uncertainty exists.

Solution: Investors should build a comprehensive analysis system, combining multiple cycle MAs with candlestick patterns, volume, KD, MACD, and other indicators for holistic judgment, rather than relying solely on one tool. An efficient trading system is key to achieving stable profits.