Complete Guide to Moving Averages: SMA Settings, Types, Calculations, and Practical Applications

What is the Moving Average? How to classify it? What is the calculation formula? How to set and use it? This article will comprehensively analyze the moving average from these perspectives—an essential yet fundamental technical indicator.

I. Basic Concepts of Moving Averages

Moving Average (MA), also called 均線, is based on the idea of summing the closing prices over a specific period and dividing by the number of days to obtain an arithmetic mean.

The basic formula is: N-day Moving Average = Sum of N days’ closing prices / N

As time progresses, a new average is generated each trading day. Connecting these averages with a line forms the moving average line. For example, a 5-day moving average sums the closing prices of the past five days and divides by 5.

The role of the moving average is self-evident—it helps traders quickly grasp short-term, medium-term, and long-term price trends. By observing the arrangement of the moving averages, one can determine the market’s bullish or bearish direction, thus identifying more suitable entry and exit points.

It is important to note that while the moving average is a fundamental tool in technical analysis, over-reliance should be avoided. It should be combined with other indicators such as MACD, Bollinger Bands, RSI, etc., to improve accuracy.

II. Three Types of Moving Averages

Based on calculation methods, moving averages can be divided into three categories:

Simple Moving Average (SMA)

• Calculated using the most common arithmetic mean method
• Assigns equal weight to all periods’ prices
• The calculation is straightforward but reacts slowly to recent price changes

Weighted Moving Average (WMA)

• Based on SMA, but assigns different weights to prices in different periods
• More recent prices have larger weights, exerting greater influence
• Reflects recent price dynamics more effectively than SMA

Exponential Moving Average (EMA)

• A special type of weighted moving average using exponential weighting
• Also emphasizes recent prices more heavily
• More sensitive to price fluctuations, enabling quicker identification of trend reversals
• Therefore, EMA is favored by short-term traders

In simple terms, WMA and EMA both emphasize “more recent data,” with EMA being more responsive to recent price movements, thus capturing short-term trend changes more accurately.

Practical tip: Ordinary traders do not need to memorize complex formulas; trading software automatically calculates all moving average data. You just need to add the relevant indicators to your chart for direct use.

III. Setting SMA and Choosing Time Periods

Moving averages are classified by time periods into three levels:

Short-term averages (weekly level)

• 5-day MA: The average of the past 5 trading days, an important reference for very short-term trading. If the 5-day MA rises sharply and stays above the monthly and quarterly MAs, it indicates strong bullish momentum, and the stock price may turn bullish.
• 10-day MA: The average over the past 10 trading days, commonly used by short-term traders.

Medium-term averages (monthly and quarterly level)

• 20-day MA (monthly MA): Represents the average price over a month, watched by both short-term and long-term investors.
• 60-day MA (quarterly MA): The average over the past 60 days, an important indicator for medium-term trading.

Long-term averages (half-year to yearly level)

• 240-day MA (annual MA): Represents the average price over a year, used to judge long-term trends.

Depending on your trading style, you can choose the time periods accordingly:

• Short-term traders may set up combinations like 5MA, 10MA, 20MA for quick decision-making;
• Mid-term investors might focus on 20MA and 60MA;
• Long-term holders pay more attention to 60MA and 240MA.

Key point: Short-term MAs are more sensitive and reflect recent volatility promptly but are less accurate for trend prediction; long-term MAs are steadier and more reliable for trend judgment but react slower. In practice, there is no “best” period; traders should find the most suitable combination based on their trading system.

IV. How to Set and Use Moving Averages

On most trading platforms, setting moving averages generally involves the following steps:

Step 1: Enter the chart interface; platforms usually preset 5-day, 10-day, and 15-day SMA lines.

Step 2: To modify the MA type or add/remove lines, click the settings icon at the top right of the chart to access the indicator settings menu.

Step 3: In the menu, select the desired MA type (SMA, WMA, EMA, etc.) and the time span (5-day, 20-day, 60-day, etc.).

Step 4: After confirming, different colored lines will appear on your chart, facilitating visual analysis.

Additionally, besides moving averages, trading platforms support adding other indicators like MACD, Bollinger Bands, RSI, etc., which can be combined flexibly according to your trading strategy.

V. Practical Strategies for Using Moving Averages

1. Tracking Price Trends

The most straightforward method is to judge the trend based on the relative position of the price and the MA:

• When the price is above the 5MA or 10MA, it signals a bullish trend for short-term traders, suggesting a buy.
• When the price is above the monthly or quarterly MA, medium- and long-term investors may view the asset positively, suitable for holding or adding positions.
• Conversely, if the price is below the MA, it indicates a downtrend, and short or medium-term traders should consider shorting or exiting.

Bullish arrangement: Short-term MA (5MA) above medium-term (20MA, 60MA) and long-term (240MA) MAs, with all lines arranged upward, indicating an ongoing upward trend.

Bearish arrangement: Short-term MA below all long-term MAs, with lines arranged downward, indicating a continuing downtrend.

Consolidation: Price fluctuates between short-term and long-term MAs, indicating market consolidation. Traders should be cautious and wait for a clear direction.

2. Using MA Crossovers for Entry Points

A simple way to find optimal entry points is to catch MA crossovers:

Golden Cross (buy signal): The short-term MA crosses upward through the long-term MA, indicating a potential upward trend—good for buying.

Death Cross (sell signal): The short-term MA crosses downward through the long-term MA, indicating a potential downward trend—consider selling or shorting.

For example, on EUR/USD daily chart: When the short-term MA crosses above the medium and long-term MAs (forming a “three-line golden cross”), the price enters an upward trend, signaling a buy; when it crosses below, the trend turns downward, signaling a sell.

3. Combining MAs with Other Indicators

Moving averages have an inherent lag—by the time a trend is confirmed, the market may have already moved. To address this, combine them with leading oscillators like RSI:

• When RSI or similar indicators show divergence (price makes new highs/lows but the indicator does not), and
• When the MA lines show signs of flattening or turning,

simultaneous signals may indicate an imminent trend reversal.

Traders can then lock in profits or take small positions to test the waters, waiting for confirmation before enlarging positions.

4. Using Moving Averages as Stop-Loss References

Moving averages can serve as a scientific basis for setting stop-loss points, especially in trend-following strategies:

• Long positions: If the closing price falls below the 10-day (or 20-day) MA and also drops below the lowest point in the past 10 days, execute a stop-loss.
• Short positions: If the closing price rises above the 10-day (or 20-day) MA and exceeds the highest point in the past 10 days, close the position.

This approach reduces subjective judgment, relying solely on market prices, effectively minimizing emotional trading.

VI. Limitations and Improvements of Moving Averages

The main drawback of MAs is lagging. Since they are based on past data, the current price must deviate significantly from the average before the trend is reflected. Longer periods increase this lag.

Additionally, historical price movements do not necessarily predict future trends, so MAs have inherent predictive uncertainty. This explains why during high volatility, MAs may “fail” to signal timely.

Improvement strategies:

• Do not rely solely on MAs; combine with candlestick patterns, volume, KD, RSI, MACD, etc.
• Adjust MA periods dynamically based on market conditions; standard periods like 5, 10, 20, 60, 240 are not mandatory.
• Some traders use custom periods like 14MA (two weeks) or 182MA (half a year) to better fit the current environment.
• Remember the investment principle: No indicator is perfect; only a continuously optimized trading system can succeed.

In summary, the moving average is one of the most accessible yet powerful tools in technical analysis. Mastering SMA settings, crossover signals, bullish/bearish arrangements, and combining with other indicators allows you to build a relatively complete technical analysis framework. The key is to test and refine your approach through practical application to find what works best for you.