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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

What is the moving average and how do you trade with it?

A moving average is a technical indicator that measures historical and current price movements to show future market direction. Discover what a moving average is and the strategies you can use before you open a position with us.

Market trader Source: Bloomberg

What is a moving average?

A moving average (MA) is a technical indicator that can be useful in determining the future direction in a market. It does this by combining certain price points of the asset and then dividing that sum by the number of data points over a specific period - ultimately helping you to spot a possible trend.

Traders and investors generally use the historical data of price movement to spot a trend pattern, identify an entry and exit point to lessen the impact of random price fluctuations in a market. You can analyse the levels of support and resistance in a market by looking at the price charts to generate trading signals over a given time frame.

The term ‘moving’ average is derived from the replacement of old figures with new price points, changing the direction of the trend line on the chart every time. It is also known as a lagging indicator because it trails the price action of an asset over a specific period, smoothing out the price fluctuations to better spot the trend from the usual activity in the market.

This enables technical analysts to use the indicator when assessing short- and long-term timeframes to determine possible future patterns. For example, when trading finite commodities such as the US Crude, its price can see massive fluctuations due to supply and demand changes.

With us, you can use the MA indicator to analyse changes in price points on a custom date range, such as 20-, 50-, 100-, 200-day period before you take a position.

Graph shows US crude oil price fluctuations with the depiction of a moving average trend line over a period stretching from 27 October 2021 to 25 February 2023.

Types of moving averages

The two most popular types of moving averages are simple moving average (SMA) and exponential moving average (EMA).

Simple moving average

A simple moving average is an unweighted technical indicator that combines the most recent data points to determine the mean price and divide the sum by the number of time periods in the past.

Once you’ve determined the mean over a given period, you’ll divide it by the number of prices in the set. You can calculate the simple moving average of an asset’s price by following the formula below:

Image of the simple moving average formula used for calculating the future direction of a financial asset.

For example, if you track the price of an asset over the last five data points using simple moving average (ie 67, 68, 65, 67 and 68), you’d combine all the values and divide them by five (n) to get the average of 67.

Exponential moving average

An exponential moving average is an indicator that places more significance on the most recent price points of an asset when determining future direction, making the indicator responsive to new information. It’s different from simple moving average because SMA measures data sets from the past, and EMA tracks the latest price point to provide trading signals on the direction that the market could take next.

Traders and investors tend to use the EMA indicator, especially in a highly volatile market because it’s more sensitive to price changes than the SMA. For example, EMA considers the most recent price points that could be a result of company’s performance, changes in management, market sentiment or unexpected events.

Using the latest price point, you can measure the average closing price of a security over a specified number of periods, such as a 20-day, 50-day or 100-day average. You can calculate the exponential moving average using the formula below:

Image of the exponential moving average formula for measuring a security when trading.

Let’s say you chose an EMA taken over a short timeframe such as 10-day average. You’d calculate EMA by first getting the current closing price (Pt), the EMA of the previous period (EMAt-1), and the smoothing factor (k).

The smoothing factor (k) takes on a value of between 0 and 1, using the formula 2/(m+1), where m = 10.

Image of the calculation of the smoothing factor (k), where 2/(m+1), and m is equal to 10.
Price EMA (m=10)
Day one 102.4
Day two 103.6
Day three 103.5
Day four 101.2
Day five 100
Day six 104
Day seven 103.9
Day eight 102.2
Day nine 101.6
Day ten 100.9 102.33

How to start trading or investing using moving averages

You can use the moving average indicator to trade or invest with us. When trading, you’ll speculate on a financial asset’s price rising or falling without taking ownership of the underlying. You’ll use derivative products like spread bets and CFDs to go long if you believe that it’ll rise or short if you think that it’ll fall.

When investing, you’ll buy and hold an asset, taking outright ownership, with the aim of making profit in the long term and selling it when the share price goes up. With us, you’ll use our share dealing offering to invest in shares, funds, and investment trusts.
We’ve listed a few steps that you need to follow to open a position with us:

  1. Decide whether you want to trade or invest
  2. Choose your preferred market
  3. Create an account or practise on a demo
  4. Set your position size and manage your risk
  5. Open your position and monitor your trade

Spread betting

With spread betting, you’ll bet an amount of money per point of movement. You’d place a bet on whether you think the price of an asset will rise or fall and your loss or profit will depend on the extent to which your prediction was correct.

Spread betting is popular in the UK because you’ll trade on over 18,000 markets without paying capital gains tax or stamp duty.1 Additionally, spread betting is leveraged, which means you’ll only need a fraction of the full value of the trade as your deposit to open a position.

Just remember that this means that both your profits and losses will be calculated based on the full position size, not the deposit. Therefore, you have to take necessary steps to manage your risk.

Learn what spread betting is and how it works

CFD trading

CFD trading is buying and selling contracts to exchange the difference on price from the point at which the contract is opened, to when it’s closed. This derivative product can also be traded on leverage, which means you have to take steps to manage your risk.
Some traders prefer CFDs because they’re a great hedging tool to offset any losses against profits for capital gains tax (CGT) purposes.1

Discover what CFD trading is and how it works

Share dealing

You can use our share dealing platform to buy and hold shares, taking direct ownership of a piece of a company that you like. With us, you can invest in over 13,000+ shares, funds and investment trusts and pay zero commission on US shares, and just £3 on UK shares.2

Since share dealing is non-leveraged, you’ll need to pay the full value of the position upfront to get exposure. This means that your maximum risk is capped at the total cost of your investment.

Moving average strategies in trading

There are several moving averages strategies that you can use to trade with us

  1. Moving average crossover strategy
  2. Moving average ribbon strategy
  3. Moving average convergence divergence (MACD)
  4. Bollinger bands moving average strategy

Moving average crossover strategy

The moving average crossover strategy occurs when two different moving average lines intersect with one another to signal an opportunity to buy and sell. When this happens, the price level of the shorter-term moving average crosses either above or below the longer-term moving average to signal a potential change in trend line.

The short-term moving average is also considered the faster moving average because it measures prices over a shorter time frame like a 5-, 10- or 20-day period. This makes it more responsive to daily price changes.

The long-term moving average, on the other hand, is much slower and less sensitive to short-term price actions because it considers prices over a longer stretch of time like 100- or 200-day period. You can use these price levels to spot trend patterns, as well as the entry points to take a position and exit before the trend ends or reverses to the mean.

For example, when the short-term moving average (50 MA) crosses above the long-term moving average (200 MA) – also known as the golden cross – it signals that the asset price might rise and you should buy. Conversely, if the short-term moving average crosses below the long-term moving average – referred to as the death cross – it means that the price may fall, and you should consider selling.

Find out more about moving average crossovers strategies

Trading chart of the FTSE 100 displaying varying price levels over a span of 12 months from 19 January 2022 to 25 February 2023 and includes three different moving average lines of 20-, 50-, 100- or 200-day period.

Moving average ribbon strategy

A moving average ribbon is an adaptation of the crossover strategy in which a series of moving average trend lines are added onto the same chart in sequential order, to resemble a ribbon.

Generally, the moving average ribbon is created using six to eight lengths that display different trend lines, separated in 10-period intervals. For example, you’d add date ranges starting from 10-, 20-, 30-, 40-, 50-, and 60-day moving averages.

Note that you can calculate the moving average ribbon using SMA and EMA. To interpret the moving average ribbon, you’ll look at the direction that the trend lines are moving. For example, if the MA lines are moving in the same direction, this signals a strong trend. This would be MA lines in all time frames moving either upward or downward in the ribbon.

Traders and investors also measure the width between the MA lines to determine the momentum of the trend. For instance, let’s say the ribbon that the MA lines create moves parallel to one another, then that’d signal a strong trend.

However, if the MA lines form a ribbon with the lines growing farther apart from each period interval, this occurrence means that the current trend is coming to an end. Alternatively, if the MA lines are drawing closer together to the point where their crossing, this can indicate the start of a new trend.

Trading chart of the FTSE 100 displaying several price points in a span starting from 8 December 2021 to 16 February 2023 including moving average ribbons set at 10-period intervals, starting from 10-, 20-, 30-, 40-, 50-, 60-, 70- to 80-days period range.

Moving average convergence divergence (MACD)

The moving average convergence divergence (MACD) is a technical indicator that identifies changes in a market's price momentum. The indicator gathers data points from different moving average lines to determine support and resistance levels.

There are three components that are taken into consideration when making up the MACD indicator: the MACD line, signal line and the histogram. Here are some of the calculations you need to consider:

  • MACD line = 12-day EMA of closing price – 26-day EMA of closing price
  • Signal line = 9-day EMA of MACD line
  • Histogram = MACD line – signal line

You can use the indicator to determine the strength of the trend and the turning point of the trend. For example, when the MACD line crosses above the signal line, it indicates that you could buy the security, and if the MACD line crosses below the signal line, it indicates that you could sell or short the market.

Trading chart of the FTSE 100 displaying different price points in a span starting from 20 July 2022 to 1 February 2023 including MACD line, signal line and the histogram bars.

Bollinger Bands moving average strategy

Bollinger Bands are used by technical analysts to plot trend lines on a chart that display oversold or overbought levels. The two levels are on either side of the simple moving average line, two standard deviations away from the SMA of the asset’s price.

Traders and investors use the tool to measure the volatility in a market. That is, if the bands are further away from the middle line, it means that a market is more volatile, while the closer the bands are signals a more stable market.

The calculations involve taking the band on top of the middle (SMA) band and adding twice the daily standard deviation to that amount. The band below the middle band is subtracted two times the daily standard deviation.

One of the interpretations of using the Bollinger Bands is tracking the number of times that the market touches the bands to spot the signal to buy or sell. For example, if the price touches the band above the SMA line, it’ll provide an overbought signal. However, if the current price touches the band below the SMA line, it indicates an oversold signal.

Graphic showing the trading chart of the FTSE 100 cash with plotted overbought and oversold levels of the Bollinger Bands including a 20-day simple average line over a period starting from 21 July 2022 to 8 February 2023.

Explore the ins and outs of the Bollinger bands

Moving average summed-up

  • A moving average is an indicator that combines several price points and divides them by the number of data points available over a given timeframe to produce a trend line
  • The two most popular types of moving averages are the simple moving average and exponential moving average
  • The SMA adds the most recent data points over a specific period and divides the sum by the number of time periods in the past to provide signals for future price direction
  • EMA applies an increase weighting to more recent price data, whereas a SMA places an equal weighting on price data
  • There are several moving average strategies that you can use when trading, including the moving average crossover, moving average ribbon, MACD, and the Bollinger Bands

1 Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
2 Trade in your share dealing account three or more times in the previous month to qualify for our best commission rates. Please note published rates are valid up to £25,000 notional value. See our full list of share dealing charges and fees.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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