Moving averages are essential tools in technical analysis, helping traders identify and follow market trends. As lagging indicators, they reflect past price movements and assist in determining whether a financial asset is in an uptrend or downtrend. These indicators smooth out price data over a specified period, making it easier to spot directional momentum.
Many traders rely on moving averages to define trend direction. For example, when a moving average crosses below the price line, it may signal a shift from an uptrend to a downtrend—and vice versa. In this comprehensive guide, we’ll explore the core types of moving averages—Simple (SMA), Exponential (EMA), Smoothed (SMMA), and Linear Weighted (LWMA)—including their formulas, calculations, applications, and practical usage in trading platforms like MT4 and MT5.
Understanding the Period in Moving Averages
The period of a moving average refers to the number of time intervals—such as candlesticks or bars—used in its calculation. Traders can customize this value based on their strategy and timeframe. Commonly used periods include 14, 24, 36, and 200.
👉 Discover how to optimize your moving average settings for better trend detection.
A shorter period (e.g., 14) makes the moving average more responsive to recent price changes, causing it to stay closer to the current price. However, this sensitivity can generate frequent signals, some of which may be false—especially during sideways or consolidating markets.
Conversely, longer periods (e.g., 200) produce smoother lines that lag further behind price action. While these generate fewer signals, they tend to be more reliable and confirm stronger, long-term trends.
For instance, a 100-period Simple Moving Average (SMA) will react faster and cross the price line more often than a 200-period SMA. The latter moves with greater distance from the price and filters out short-term noise.
Price Application in Moving Average Calculations
While most traders apply moving averages using the closing price of each candlestick, other price points can also be used:
- Open: The starting price of a period
- High: The highest price reached during the period
- Low: The lowest price reached
- Medium Price (HL/2): (High + Low) / 2
- Typical Price (HLC/3): (High + Low + Close) / 3
- Weighted Close (HLCC/4): (High + Low + Close×2) / 4
Each method produces a slightly different moving average line. However, the closing price is generally preferred because it reflects the final consensus on an asset’s value after market participants have evaluated news, reports, and sentiment throughout the session.
Core Types of Moving Averages
Simple Moving Average (SMA)
The Simple Moving Average calculates the arithmetic mean of a set number of prices over a defined period. It treats all data points equally.
Formula:
SMA = (Sum of Closing Prices) / Number of Periods
For example, using closing prices: 4, 7, 6, 4, 8, 5, 7, 7, 8, 5
A 5-period SMA would start as:
(4 + 7 + 6 + 4 + 8) / 5 = 5.8
Each new candle replaces the oldest one in the calculation window.
SMA is ideal for identifying long-term trends but reacts slowly to sudden price changes.
Exponential Moving Average (EMA)
The Exponential Moving Average gives more weight to recent prices, making it more responsive to new information.
Formula:
EMA = EMAₚᵣₑᵥ + WM × (Current Price – EMAₚᵣₑᵥ)
Where:
- WM (Weight Multiplier) = 2 / (N + 1)
- N = number of periods
Using the same data with N=5:
WM = 2 / (5+1) = 0.33
First EMA = SMA = 5.8
Second EMA = 5.8 + 0.33×(5 – 5.8) = 5.53
EMA reduces lag and is widely used by short-term traders who need timely signals.
Smoothed Moving Average (SMMA)
The Smoothed Moving Average aims to reduce volatility by incorporating all historical data while gradually decreasing the influence of older prices.
Formula:
SMMA = (Previous SMMA Sum – Previous SMMA + Current Close) / N
The first value is a standard SMA. Subsequent values are smoothed recursively.
Using our data:
First SMMA = 5.8
Second SMMA = (29 – 5.8 + 5) / 5 = 5.64
SMMA produces a very smooth line and is less common than SMA or EMA but useful for filtering market noise.
Linear Weighted Moving Average (LWMA)
The Linear Weighted Moving Average assigns increasing weights to more recent prices.
Formula:
LWMA = Σ(Price × Weight) / Σ(Weights)
For a 5-period LWMA: weights are 5, 4, 3, 2, 1 → sum = 15
Using the fifth set of prices:
(8×5 + 7×4 + 7×3 + 5×2 + 8×1) / 15 = 7.1
LWMA is the most sensitive of all four types due to its heavy emphasis on recent data.
Comparing All Moving Averages
When plotted together, SMA, EMA, SMMA, and LWMA show distinct behaviors:
- SMA & SMMA: Smoothest lines; best for stable trend identification
- EMA & LWMA: More reactive; ideal for catching early trend shifts
👉 See how combining multiple MAs improves signal accuracy across market conditions.
Choosing between them depends on your trading style:
- Long-term investors → prefer SMA or SMMA
- Day traders → often use EMA or LWMA
Shifting Moving Averages: Does It Help?
Some platforms like MT5 allow shifting the MA line forward or backward along the chart.
- Backward shift: Often set to half the period (e.g., shift 14-period MA back by 7 bars)
- Forward shift: Not recommended—it projects into the future without real data
While some traders believe backward shifting aligns MA with its "true" center point, it can distort interpretation by introducing misleading early signals. Most professionals recommend using unshifted MAs for accurate trend confirmation.
How to Use Moving Averages in Trading
Moving averages tell the same story—trend direction—but in different ways. Here’s how to apply them effectively:
- Trend Identification: Price above MA → uptrend; below → downtrend
- Crossovers: Short-term MA crossing above long-term MA → bullish signal (Golden Cross); opposite → Death Cross
- Dynamic Support/Resistance: MAs often act as moving support in uptrends or resistance in downtrends
However, relying solely on moving averages isn’t advisable. Combine them with:
- Oscillators (like RSI or MACD)
- Chart patterns
- Volume analysis
- Fundamental insights
This multi-layered approach increases confidence in trade decisions.
Adding Moving Averages in MT4 and MT5
To add a moving average:
- Go to Insert > Indicators > Trend > Moving Average
- Or click the MA icon on the chart toolbar
MA Properties Explained
Right-click the MA line and select "Properties" to adjust:
- Parameters: Set period, shift, method (SMA/EMA/etc.), and price type
- Levels: Add offset lines for dynamic zones
- Visualization: Choose timeframes where the MA appears
Frequently Asked Questions (FAQ)
Q: What is the best moving average for day trading?
A: The Exponential Moving Average (EMA) and Linear Weighted Moving Average (LWMA) are preferred due to their responsiveness to recent price changes.
Q: Which moving average is best for long-term investing?
A: The Simple Moving Average (SMA), especially the 200-period SMA, is widely used to identify major market trends.
Q: Can I use multiple moving averages together?
A: Yes—traders often combine short and long-term MAs (e.g., 50 & 200) to spot crossovers and confirm trend strength.
Q: Why does EMA react faster than SMA?
A: Because EMA applies greater weight to recent prices, reducing lag compared to SMA’s equal weighting.
Q: Is LWMA better than EMA?
A: LWMA is more sensitive due to linear weighting, but this can lead to false signals. EMA offers a balanced compromise between speed and reliability.
Q: Should I shift my moving average?
A: Generally no—shifting can distort signals. Use unshifted MAs for clearer trend interpretation.
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