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Moving averages

The simplest indicator, and the most popular with big players. Here is why price so often bounces off a moving average, how SMA differs from EMA, and which length fits which trend.

Way to Lambo · 6 min read · level: beginner

Contents
  1. What it is
  2. Why price bounces off it
  3. Which length to choose
  4. How to trade off the average
  5. Common mistakes

In short

What it is
The average closing price of the last N candles. The line smooths out noise and shows direction.
SMA vs EMA
SMA is a simple average where every candle counts equally. EMA is exponential: recent candles weigh more.
Used for
Reading the trend, finding dynamic support or resistance, filtering trades.
Weak spot
In a range the line is useless: price cuts through it both ways.

What it is

A moving average (MA) is the average closing price of the last N candles, recalculated on every new candle. Take 20 candles and you get the 20 EMA or 20 SMA; take 200 and you get the long-term trend line.

A simple moving average (SMA) treats every candle the same. An exponential one (EMA) gives more weight to the latest candles, so it reacts to a reversal faster. Traders usually trade bounces off an EMA and use the 200 SMA as a global trend filter.

Why price bounces off it

A large share of market volume runs through algorithms, and many of them are built on moving averages. A big participant can't buy their full size at one price: they build the position gradually, on pullbacks within the trend. The simplest reference for that is the average price over a period.

That is why in a strong trend price touches the average again and again and bounces: that's where buy algorithms kick in. On the time & sales tape it shows up as a series of buys of the same size or with growing pressure.

Bounces off the 20 EMA in an uptrendEMA 20bounces off EMA 20
An uptrend: every pullback to the 20 EMA meets a buyer. Illustrative data.

Which length to choose

The length depends on the angle of the trend. The rule is simple: the steeper the trend, the shorter the average.

  • 20 EMA — a sharp, active trend. Price barely leaves the line.
  • 50 EMA — a smooth trend with deeper pullbacks.
  • 200 EMA — the global trend. Above it the market is considered bullish, below it bearish.
20, 50 and 200 EMA on one chartEMA 20EMA 50EMA 200
Three averages at once: the fast one holds the momentum, the slow one shows the big picture.

A good habit is to keep two averages on the chart: a fast one for entries and a slow one as a filter. Look for longs only when price is above the 200 EMA.

How to trade off the average

01
Identify the trend
The averages point up and are stacked in order: 20 EMA above 50 EMA, 50 EMA above 200 EMA.
02
Find the working average
Check the history: whichever line price bounced off the last 3–5 times is the one that works on this asset.
03
Wait for the touch
Enter on the pullback to the average, not after a big green candle. Chasing price is the main way to buy the top.
04
Look for confirmation
A candle with a long lower wick, an engulfing candle, a volume spike at the line.
05
Stop below the average
With a margin below the line or below the last swing low. If price closes below the average and doesn't come back, the setup is broken.

In a range a moving average doesn't work: price crosses it back and forth, and every entry turns into a small loss. Identify the market phase first, then choose the tool.

Common mistakes

Trading the average in a range

The average is flat and price cuts through it. That's a sign of a range — here you need levels or oscillators, not an MA.

Hunting for the perfect length

There's no magic number. 20, 50 and 200 are popular precisely because everyone uses them, so more participants react to them.

Putting the stop right on the line

Price often pokes through the average with a wick. The stop needs a margin — behind structure, not behind the line.

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