Moving Average Trading Strategy: How to Trade MAs for Beginners
Moving averages are the simplest way to see the trend and avoid trading against it. We walk through two practical setups for beginners, the pullback to the average and the moving average crossover, where to put the stop-loss in each, and why they fail in a sideways market.
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What a moving average is
Quick definition in the glossary: moving average. It is a line showing the average closing price over the last N candles, which smooths out the noise. There are two main types: the simple moving average (SMA) and the exponential moving average (EMA), which gives more weight to recent candles. There is a separate glossary entry for it: EMA.
Which periods to use
| Average | What it shows | How it is used |
|---|---|---|
| EMA 20 | Short-term momentum | Pullback zone in a strong trend |
| EMA or SMA 50 | Medium-term trend | Pullback zone in a normal trend, direction filter |
| SMA 200 | Long-term trend | Above it the market is "bullish", below it "bearish" |
All periods are for the daily chart. On the 4-hour chart the setup is the same, but there are more signals and they are weaker. You do not need six averages on the chart: two or three are enough.
Setup 1: pullback to the average in a trend
This is the main setup for beginners. The idea: in a trend, price moves in waves and often comes back to the average before continuing.
- Trend filter: price is above the SMA 200 and the EMA 20 is above the EMA 50 — look for buys only.
- Wait for a pullback to the EMA 20 or EMA 50. Buying after a big green candle, far from the averages, means buying the top.
- Confirmation: price holds at the average and a candle closes higher. How to read these candles: how to read candlestick charts.
- Stop goes below the local low of the pullback, not below the average itself: the average moves every day.
Setup 2: moving average crossover
When the fast average crosses above the slow one, it is a buy signal; when it crosses below, it is an exit signal. The best-known version is the golden cross (SMA 50 crossing above SMA 200). The upside: it catches big trends. The downside: heavy lag. By the time the lines cross, a good part of the move is already over, and in a sideways market crossovers come one after another and produce a string of losses. That is why the crossover works better as a direction filter, with the actual entry found using setup 1.
A trade example with numbers
A hypothetical example. On the daily chart a coin is above the SMA 200, the EMA 20 is above the EMA 50, and the previous high is $55. Price has pulled back to the EMA 20 around $48, the pullback low is $46.80, and the EMA 50 is at about $47. The daily candle closed higher off the average. Account size: $3,000, risk 1%, or $30.
| Parameter | Value |
|---|---|
| Entry | $49 — after a bullish candle closes off the EMA 20 |
| Stop-loss | $46.50 — below the pullback low and below the EMA 50 |
| Risk per coin | $2.50 |
| Position size | $30 / $2.50 = 12 coins (~$590) |
| Target 1 | $55 — the previous high: +$6, about 2.4 to 1 |
| Exit on the average | Close the rest if a daily candle closes below the EMA 20 |
At the first target it makes sense to close part of the position and move the stop to breakeven, then trail the rest behind the average — similar to a trailing stop. If price breaks $46.50, the stop closes the trade with a loss of about $30 plus fees. Recalculate the position in the position size calculator.
Common mistakes
- Trading crossovers in a sideways market. If the averages are tangled and flat, there is no trend and the setup does not work. Signs of a range: sideways market.
- Putting the stop exactly on the average. Price often dips just below it, and the stop gets hit right before the move up.
- Tuning periods to past charts. A "perfect" EMA 37 on history almost never repeats its results in the future.
- Buying far from the average after a strong move: the stop ends up wide and the position small.
What you are risking
- Lag. An average is built from past prices and always trails a sharp reversal.
- Strings of small losses in a sideways market — you need to sit through them without increasing your position.
- Gaps and sharp candles. Price can jump past your stop, so risk no more than 1–2% of your account. The rules: risk management in trading.
We cover indicators, trends and levels in detail in the free Aspiro Academy lessons (in Russian) "Technical Analysis: Trend and Levels" and "Indicators Without the Hype".
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- Moving averages show the trend; they do not work in a sideways market.
- The main setup is a pullback to the EMA 20 or 50 in the direction of the trend.
- Stop below the pullback low, not exactly on the average; risk 1–2% of your account.
FAQ
Which moving average should I use: SMA or EMA?
The EMA reacts faster to recent candles; the SMA is smoother and slower. For short periods (20) traders usually pick the EMA, for long ones (200) the SMA. For a beginner there is no fundamental difference: it matters more to pick one setup and not change it after every trade.
What are the most popular moving average periods?
20, 50 and 200 on the daily chart. A lot of market participants watch them, so price often reacts to exactly these lines.
What is a golden cross?
It is when the 50-day average crosses above the 200-day average. It is seen as a sign of a change in the long-term trend, but it lags a lot and can be false in a sideways market.
Do moving averages work in a sideways market?
Poorly. When price moves in a range, the averages get tangled and crossovers produce a string of small losses. Moving averages are a tool for trending markets.
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