Choosing the right moving average length to best suit your trading objectives can quickly improve performance. There are many potential moving average lengths to choose from, so analysis is required.
Three types of moving average periods
Short-term moving average
A short-term moving average setting would be from 5 to 25 bars. Popular lengths are 5, 10, 13, and 21 bars.
Medium-term moving average
A medium-term moving average setting would be from 26 to 75 bars. Popular lengths are 30, 50, and 75 bars.
Long-term moving average
A long-term moving average setting would be from 76 to 200 bars. Popular settings are 100 and 200 bars.
Follow the steps below when setting the moving average period.
Step 1: Select a trading style
There are three types of trading styles; scalping, day trading, and swing trading. The appropriate moving average period will vary depending on which trading style you choose. Short-term trading strategies require short-term moving averages, and vice versa for longer-term trading strategies.
When scalping, use a 1-minute or 5-minute chart with a moving average period of 5 to 10 bars. A moving average period of 10 to 30 bars on a 5-minute, 15-minute, or 60-minute chart is appropriate when day trading. For swing trading, you set up moving average periods of 10 to 200 bars on daily and weekly charts.
In the long run, it is usually best to concentrate on one trading style. Before deciding which trading style to use, you should try each trading style on a demo account and choose the one that best suits your personality and lifestyle.
Step 2: Test different moving average periods on historical data
Once you have decided on a trading style, test the strategy on historical data. Tools such as MT4 and MT5 allow you to quickly analyse a large amount of chart data to find the best moving average period. While back testing can be very useful, be careful not to put too much trust in the results of your analysis. There is no guarantee that strategies that have been profitable in the past will produce similar results in the future.
Step 3: Test on a demo account
Once you have determined the optimal moving average period, the next step is to practice trading with a demo account. Demo trading allows you to check the practicality of your verification results without the pressure of losing real money. Repeat the trade practice until you can earn a steady profit here.
Step 4: Trade on a real account
Once you have become profitable in your demo account, trade in your real account with confidence. Increase your position size as you make profits. However, if the strategy is not working as expected, reduce the position size or stop trading, then improve the trading strategy.
When to change moving average periods
Continued losses make it tempting to change the moving average period, but thought and analysis are required. It is easy to blame the indicator for poor performance, but it is not always the indicator. Before changing the moving average period, check if you are following your trading plan. Many losses are due to late entry, poor risk management, and mental control rather than the indicator.
After you have analysed your trades and determined that you are following your strategy, you may want to try changing the moving average period. Analyse the performance of various moving average lengths with recent market data to see which period would be most profitable to set.
Shorter-term moving average periods are more profitable when the trends are strong. On the other hand, if the market trend is weakening, it is better to increase the moving average period.
However, be aware that changing moving average periods too frequently can complicate the trading process. Also, since there is no perfect indicator, it is wise to settle on one moving average period. Understand the pros and cons of that moving average period, and continue to trade using the aspects of the pros.