How To Use Best Moving Averages for Day Trading?

If you’re looking for an edge in day trading, moving averages are a solid way to go forward! 

Day trading involves rapid price movements driven by various factors such as news releases, market sentiment, and intraday buying and selling pressure. Traders closely monitor these fluctuations to identify opportunities for quick gains through buying low and selling high, or selling short and buying back at a lower price. 

Moving averages are a fundamental technical analysis tool used by traders to smooth out these price fluctuations over a specified period. The idea is to take historical data and identify trends and potential entry /exit points in the market, which helps make informed decisions.

In this article, we will understand what the best moving averages for day trading are, and how you can leverage them optimally in your trading strategies. 

What Are Moving Averages?

Before we discuss how to use best moving averages for day trading, let’s first understand what they are. 

Moving averages are an analysis tool used by traders to identify price changes over a specific period. They serve as a smoothing mechanism, filtering out short-term price fluctuations to reveal underlying trends more clearly. 

Traders use two moving averages, one with a shorter time frame, and one with a longer time frame, to generate trading signals. 

When the shorter-term moving average crosses above the other one, it indicates an uptrend, essentially signaling a buying opportunity. Conversely, when the shorter-term moving average crosses below the longer-term moving average, it is a downtrend, making it a good time to sell.

The choice of the period for the moving averages depends on the trader’s preference. Shorter time frames such as five or 10 days are more sensitive to price fluctuations and generate more signals. On the other hand, longer periods, such as 50, 100, or 200 days are less sensitive to price movements and provide smoother trends.

What Are The Different Types of Moving Averages?

Moving averages come in various forms, each with its calculation method and characteristics. Here are the most common types:

Simple Moving Average (SMA)

The SMA is the most straightforward type of moving average. It calculates the average price of an asset over a specified number of periods equally. Each data point has the same weight in the calculation, making it sensitive to all price movements. 

While SMAs are easy to understand and interpret, they may lag behind current price action due to their equal weighting. 

Exponential Moving Average (EMA)

Another popular moving average is EMA.  It gives more weight to recent price data, making it more responsive to changes compared to SMA. 

It applies a greater weighting to the most recent prices, resulting in a faster reaction to price movements. This responsiveness makes EMAs popular among traders looking for quicker signals and trend identification. 

Weighted Moving Average (WMA)

Similar to the EMA, the WMA assigns more weight to recent prices. However, it does so in a linear fashion. 

This means that the most recent prices have the highest weighting, gradually decreasing as you move back in time. WMAs are more responsive than SMAs but less sensitive than EMAs, providing a balance between the two.

Smoothed Moving Average (SMMA)

The SMMA is a type of moving average that applies equal weight to all periods but smoothens the resulting line by applying a smoothing factor. 

Smoothing, in the context of moving averages, refers to the process of reducing noise (volatility) in the price data by averaging out fluctuations over a specified period. This reveals the underlying long-term trends more clearly. 

The factor in SMMA determines the level of smoothing applied to the data, with higher values resulting in smoother lines. 

Volume Weighted Moving Average (VWMA)

Unlike other moving averages that consider only price data, the VWMA incorporates volume into its calculation. It calculates the average price of an asset weighted by the volume traded during each period. 

VWMA is particularly useful for analyzing trends in conjunction with volume, providing insights into the strength of price movements.

Each type of moving average has its advantages and drawbacks, and the choice depends on the trader’s preference, trading style, and the specific market conditions they are analyzing. 

By understanding the characteristics of each moving average, traders can effectively incorporate them into their technical analysis toolkit to make informed trading decisions. 

EMA vs. SMA: What Is The Best Moving Average? 

The choice between Exponential Moving Average (EMA) and Simple Moving Average (SMA) hinges largely on their speed of responsiveness to price changes.

Understanding The Difference Between EMA And SMA 

EMAs, due to their weighting system favoring recent data, react swiftly to shifts in price direction. In contrast, SMAs equally weigh all periods, and thereby move more slowly and lag behind price movements. 

Given this, both EMAs and SMAs offer distinct advantages and drawbacks. 

EMAs excel in providing early signals when prices change direction, which is ideal for traders seeking quick responses to market shifts. However, this swift responsiveness can lead to premature signals, resulting in false trading cues, particularly during volatile market conditions. 

On the other hand, SMAs, by their smoother and slower movements, offer fewer false signals but may delay entry and exit points, potentially causing traders to miss out on early profit opportunities. 

Making The Choice Between EMA And SMA

When it comes to deciding the best moving averages for day trading, it is crucial to understand that the “best” is subjective and contingent upon your unique trading approach and comfort level with risk. 

Traders comfortable with frequent adjustments and early signals generally lean towards EMAs, despite the risk of false cues. On the other hand, people who prioritize stability in trading opt for SMAs, which keep them in trades longer with fewer premature exits. 

Note that experimentation and observation of performance in various market conditions are key to identifying the moving average that’s best for your trading success. 

What Is The Best Period Setting For Moving Averages?

Since moving averages analyze trends over a particular period, traders need to specify a time frame for the strategy. 

This period determines the number of data points considered in the moving average calculation, and thereby greatly influences the signals generated by indicators. It is, therefore, understandably crucial for day traders to select the optimal time is crucial for successful day trading. 

Periods For Day Trading

For short-term traders, fast-reacting moving averages are essential to capture immediate price changes. Exponential Moving Averages (EMAs) are favored in this scenario due to their rapid response to price fluctuations.

Popular period settings for day trading include:

  • 9 or 10 periods: extremely fast-moving, often used as directional filters
  • 21 periods: medium-term and accurate for trend riding
  • 50 periods; long-term moving averages suitable for identifying broader market directions

Periods For Swing Trading

Swing traders, operating on higher time frames and holding positions for longer durations, require moving averages that filter out noise and provide reliable trend signals.

Here, Simple Moving Averages (SMAs) are preferred, with an emphasis on higher period settings. 

Key period settings for swing trading are:

  • 20 /21 periods: preferred for short-term swing trading due to strong trend respect
  • 50 periods: standard swing trading moving average, ideal for trend riding
  • 100 periods: effective for support and resistance, particularly on daily or weekly time frames
  • 200 /250 periods: popular on daily charts, providing a broader perspective on long-term price trends

The choice of period setting for moving averages depends on individual trading style, time frame, and desired level of responsiveness. 

Day traders prioritize faster-moving averages for immediate signals, while swing traders opt for longer periods to filter out noise and capture more sustained trends. 

Ultimately selecting the best period setting entails aligning the moving average strategy with individual trading objectives and market conditions.

How To Correctly Use Best Moving Averages For Day Trading?

If you want to master moving averages for day trading, here are some tips that will come in handy:

Choose The Right Type And Length Of Moving Average

Selecting the appropriate moving average type and length is paramount for effective day trading.

Simple Moving averages (SMA) and Exponential Moving Averages (EMA) offer distinct advantages. SMA provides stability, while EMAs offer quicker reactions to price movements.

Other than this, you also need to consider the length of the moving average, as it significantly impacts trend identification. Shorter lengths offer immediate insights, while longer lengths provide a broader perspective. 

Based on these specific characteristics, you should determine which type of moving average aligns best with your trading style and objectives. 

Combine Multiple Moving Averages

Enhancing analysis by using a combination strategy in moving averages is highly popular among day traders. It involves using a faster moving average crossing over a slower one, to amplify the visibility of trend strength and direction. 

By aligning the moving averages appropriately, you gain deeper insights into market dynamics, facilitating more informed trading decisions. 

Adding to this, you can also integrate complementary technical indicators like Bollinger bands, Envelopes, MACD, etc. for additional layers of insight into market conditions. This gives you a comprehensive understanding of trend formation and market momentum, enabling more precise entry and exit points. 

Utilize Chart Patterns

Incorporate chart patterns into your moving average strategy to further improve your trend analysis. Chart patterns, such as triangles, flags, and head and shoulders provide visual cues about market behavior. 

When combined with moving averages, these patterns serve as potent indicators of trend continuation or reversal, empowering traders to navigate the market landscape confidently. 

Implement Expert Systems

To make the most of moving averages, you can also consider leveraging automated trading systems or Expert Advisors (EAs) tailored to moving averages. 

These systems streamline trading processes, executing predefined strategies based on moving average signals.

Note that while caution is warranted here, modern platforms offer user-friendly tools for creating and deploying expert systems, ultimately providing a seamless and efficient approach to day trading. 

What Are The Benefits Of Using Moving Averages For Day Trading?

Here are some of the primary benefits of using best moving averages for day trading:

Trend Identification

Moving averages help identify market trends by smoothing out price fluctuations making it easier for traders to discern the overall direction of price movements. 

Entry And Exit Signals

By crossing over or under each other, moving averages generate signals indicating potential entry or exit points, aiding traders in timing their trades effectively.

Support and Resistance Levels

Moving averages serve as dynamic support and resistance levels, offering insights into areas where prices are likely to encounter obstacles or reverse direction. 

Trend Confirmation 

When multiple moving averages align in a particular direction, they confirm the strength and validity of a trend, providing traders with added confidence in their trading decisions. 

Risk Management

Moving averages provide objective criteria for trade entry and exit, which helps traders implement risk management strategies, such as setting stop-loss orders and determining position sizes to mitigate potential losses. 

What Are The Disadvantages Of Using Moving Averages For Day Trading?

While moving averages can shape your trading strategy, they also have some associated drawbacks:

Lagging Indicators

Moving averages are inherently lagging indicators, meaning they rely on past price data to generate signals. As a result, they may fail to anticipate sudden market reversals or changes in trend direction, leading to missed opportunities or delayed responses. 

False Signals

During periods of market volatility, moving averages may produce false signals, resulting in premature trade entries or exits. Traders may experience losses when relying solely on moving average signals without considering other market factors.

Lack Of Adaptability

Moving averages are static indicators that do not adapt quickly to sudden shifts in market conditions. Traders often find it challenging to rely solely on moving averages during periods of rapidly changing market dynamics, leading to suboptimal trading decisions. 

Frequently Asked Question

What is the best way to trade moving averages?

The best way to trade moving averages is to combine them with other indicators for confirmation and better trend prediction. 

Additionally, maintaining a trading journal to track performance and refine strategies over time also helps identify strengths, weaknesses, and areas of improvement in your moving average trading approach.

All the information made available here is generally provided to serve as an example only, without obligation and without specific recommendations for action. It does not constitute and cannot replace investment advice. We therefore recommend that you contact your personal financial advisor before making a purchase decision.

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