Moving averages are one of the most popular technical indicators which traders on all financial markets use. There are many types of moving averages which are used when trading the financial markets but the most commonly used ones are the Simple Moving Average (SMA)and the Exponential Moving Average (EMA). These are used to determine upward and downward trends in the market. The “smooth” price data by showing a simple flowing line. The line shows the average price over a given period of time. If the price is trading above the moving average line then it is in an uptrend and if the price is below the moving average line then it is in a downward trend. Looking for prices to move above or below these lines gives us a good indication of when to buy and sell.

Simple Moving Average
The SMA is the most popular of the 3 moving averages and of course the most simple as per its name. It calculates the average price over a set number of periods. For example, to calculate a 25-day moving average, you add together the 25 previous closing prices and divide by 25.

Exponential Moving Average
The EMA is similar to the SMA in the sense that it too calculates the average price over a set number of periods. However, the EMAs give more weight to recent price data and they react faster to price changes.

Where and how to use? (Single Moving Average)

Above is an example of the EURUSD chart with a 200-day EMA. This can be a very effective indicator when looking for trend reversals and it can also work as a support/ resistance line. At the beginning of the chart, you can see the price move above the EMA which signaled the trend to reverse from a downward trend to an upward trend. Once this was confirmed the EMA line acted as a support line on 3 occasions (red circles).

Where and how to use? (Multiple Moving Averages)

Above is an example of the EURUSD chart with a 20-day EMA (Pink Line) and a 50-day EMA (Yellow Line). Using multiple moving averages can help when looking for trend reversals. When a price is on an upward trend, the larger period moving average will be below the lower period moving average. When a price is on a downward trend, the larger period moving average will be above the lower period moving average. On multiple occasions in this chart, you can see the 2 EMAs crossover and the price following in the opposite direction (blue arrows). As these were very brief trend reversals, most traders would not use this type of strategy to enter longer term trades, but this is a popular method used by short term binary options traders.

There are many different combinations which traders tend to use when using multiple moving averages and it is purely down to preference. My preference is having 10, 20, 50 and 200-day EMAs on my charts.

Please note that technical indicators should not be used solely when making decisions on the financial markets.

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