Moving averages explained: SMA, EMA, WMA and crossovers

A moving average is the average price over the last N candles, recalculated every time a new candle closes. It turns a jagged chart into a smooth line that shows the direction of the market at a glance. Every moving average makes the same trade-off: the smoother it is, the later it reacts.

SMA: the simple moving average

The SMA adds up the last N closes and divides by N. Every candle in the window has the same weight, and when a new candle arrives, the oldest one drops out.

Example with a 5-period SMA. The last five closes are 1.1000, 1.1004, 1.1002, 1.1008 and 1.1010. Their sum is 5.5024, so the SMA is 1.10048. If the next close is 1.1020, the oldest value (1.1000) drops out and the SMA becomes (1.1004 + 1.1002 + 1.1008 + 1.1010 + 1.1020) / 5 = 1.10088.

One quirk: because old values drop out abruptly, an SMA can move noticeably when an unusual candle from N periods ago leaves the window, even if nothing is happening now.

EMA: the exponential moving average

The EMA gives more weight to recent closes and lets older ones fade gradually. Each new value is a blend of the latest close and the previous EMA:

EMA = previous EMA + k × (close − previous EMA), where k = 2 / (N + 1).

For a 9-period EMA, k = 0.2: each new close pulls the average 20% of the way toward it. In the example above, if the previous EMA was 1.1005 and the new close is 1.1020, the new EMA is 1.1005 + 0.2 × 0.0015 = 1.1008. The EMA reacts faster than an SMA of the same period and has no "drop-out" jumps.

WMA and the faster variants

• WMA (weighted moving average) assigns linearly decreasing weights: in a 5-period WMA the newest close counts 5 times, the next 4 times, and so on down to 1. It sits between SMA and EMA in responsiveness.
• Hull MA combines WMAs of different lengths to reduce lag sharply while staying smooth. It turns quickly, which also means it can overshoot in choppy markets.
• DEMA (double EMA) and TEMA (triple EMA) subtract part of the lag that a plain EMA carries. They hug price more closely, so they also react to more noise.

All of these are available in the Sky Trade terminal alongside SMA and EMA. The faster variants are not "better" moving averages; they just pick a different point on the speed-versus-smoothness trade-off.

Choosing periods

Common periods and how they are usually used:

There is nothing magical about these numbers. Popular periods matter mainly because many people watch them, which is more true of the 50 and 200 on higher timeframes than of anything on S10. A "50-period" average also means very different things on different timeframes: on M1 it covers 50 minutes, on H1 about two trading days.

Crossovers

A crossover happens when a faster average crosses a slower one, or when price crosses an average:

• Fast above slow (for example 9 EMA crossing above 21 EMA) suggests upward momentum.
• Fast below slow suggests downward momentum.

Crossovers work reasonably in sustained trends and badly in ranges, where the averages tangle and cross repeatedly. They also lag by construction: the crossover appears only after a move has already happened. MACD is essentially an EMA crossover turned into an oscillator, so the same strengths and weaknesses apply.

Dynamic support and resistance

In a trend, price often pulls back to a moving average and resumes from there. Traders call this dynamic support (in an uptrend) or dynamic resistance (in a downtrend), since the level moves with price. It is a softer version of horizontal support and resistance: an area to watch, not a wall. In a strong trend, price may barely touch a 21 EMA; in a weak one, it will cut through it.

A worked example

On EUR/USD M5 you plot a 20 EMA and a 50 SMA. Over the morning:

1. Price rises, the 20 EMA crosses above the 50 SMA at 1.0852. The crossover appears after price has already climbed about 10 pips from the low — that is the lag.
2. Price pulls back twice to the 20 EMA, at around 1.0861 and 1.0868, and bounces each time. The EMA is acting as dynamic support.
3. Around midday, price slices through the 20 EMA, drifts down to the 50 SMA, then chops sideways. The two averages flatten and cross twice in 40 minutes, producing two signals that both fail.

That sequence — a lagging signal, a few good pullbacks, then a messy range full of false crossovers — is close to the typical life cycle of a moving-average setup.

Moving averages on short expiries

On second-based timeframes, moving averages follow price closely and cross constantly, so their signals mostly reflect noise. For expiries of one to a few minutes, many traders read the slope of an EMA on M1 or M5 as a direction filter, and use lower timeframes only to time entries in that direction. A flat average is a sign that there is no trend to follow.

Typical mistakes

• Trading crossovers in a sideways market.
• Using a dozen averages at once, so that something is always crossing something.
• Optimising periods on yesterday's chart until they fit perfectly — and fail today.
• Treating the average as a precise level instead of a zone.
• Assuming averages work differently on OTC: on Sky Trade, OTC prices are generated by the server, do not track any real market and have an unpredictable next move.

How to add them in the Sky Trade terminal

Open the Indicators menu and switch on SMA, EMA, WMA, Hull MA, DEMA or TEMA in the Trend group; each one has its own period stepper. Each type can be switched on once, so to build a crossover pair, combine two different types — for example a short EMA with a longer SMA, as in the example above.