Best Moving Average Settings for Day Trading

In the fast-paced world of day trading, where every second counts, traders rely on moving averages to smooth out price data and make sense of chaotic market movements. Moving averages (MAs) serve as essential technical indicators, helping traders determine trends, identify entry and exit points, and avoid false signals. But how do you know which moving average settings to use for optimal results?

This question haunts many traders, and getting the settings right can mean the difference between a profitable day or a series of frustrating losses. Understanding the role of different types of moving averages and their settings is crucial for maximizing success in day trading. By the end of this guide, you'll have a clear understanding of the best moving average settings, how to use them effectively, and why tweaking these settings based on your trading style can significantly impact your profitability.

What Are Moving Averages in Day Trading?

Before we dive into the best settings, it’s essential to know what moving averages (MAs) are and why they matter.

A moving average is a technical indicator that calculates the average price of a security over a specific number of periods. It’s called a "moving" average because, with each new price data point, the average moves forward. The primary purpose is to smooth out short-term fluctuations in the price of an asset, revealing the underlying trend.

Two of the most commonly used moving averages in day trading are:

1. Simple Moving Average (SMA) – This calculates the average price over a set number of periods, giving equal weight to all periods.
2. Exponential Moving Average (EMA) – This type of moving average gives more weight to recent prices, making it more sensitive to price changes.

Each moving average type has its strengths and weaknesses. SMA is slower and better suited for identifying long-term trends, while EMA is quicker at detecting shifts in the market and is preferred by day traders for fast trades.

Why Moving Averages Are Important for Day Traders

For day traders, moving averages act as a guide for understanding short-term price action. They help:

• Identify trends: MAs allow traders to determine if an asset is trending upward, downward, or moving sideways.
• Spot entry and exit points: Traders use crossovers, where short-term MAs cross above or below longer-term MAs, to signal buy or sell opportunities.
• Avoid false signals: MAs help traders avoid entering trades during periods of market "noise," reducing the chances of being whipsawed by price fluctuations.

But, one size doesn’t fit all when it comes to the settings for these moving averages. Different traders use different time frames and settings based on their individual strategies, risk tolerance, and market conditions.

Best Moving Average Settings for Day Trading

The "best" moving average settings for day trading largely depend on your trading style, risk tolerance, and market conditions. However, there are a few tried-and-tested setups that many successful traders use.

Short-Term (Fast) Moving Average Settings

For scalpers and traders who like to make quick, multiple trades throughout the day, short-term MAs are a go-to tool. These traders prefer speed over precision, and fast MAs allow them to act quickly on price movements.

• 5-period EMA: The 5-period EMA is highly sensitive to price changes and is ideal for spotting very short-term momentum shifts. It’s commonly used in conjunction with a longer-term MA, like the 20-period EMA, to form a crossover strategy.

• 9-period EMA: A slightly less volatile option than the 5-period EMA, the 9-period is often used by traders to smooth out some of the "noise" but still capture short-term trends.

These shorter EMAs are excellent for traders looking to scalp or catch small price swings in highly liquid markets like forex or popular stocks like Apple or Tesla.

Mid-Term (Intermediate) Moving Average Settings

Day traders who prefer a bit more patience may opt for mid-term moving averages. These MAs strike a balance between capturing significant price movements while filtering out some of the false signals caused by market noise.

• 20-period EMA: One of the most popular MAs for day traders, the 20-period EMA offers a smoother price line while still responding quickly to recent price changes. It’s often used in combination with a shorter-term MA to confirm trends.

• 50-period SMA: Although slower, the 50-period SMA is a reliable indicator of the medium-term trend. When combined with shorter EMAs, traders can use it as a baseline for determining whether the market is bullish or bearish over a longer period.

Long-Term (Slow) Moving Average Settings

Longer-term MAs are usually too slow for most day traders, but they can still be useful in confirming the overall trend. Combining a long-term MA with faster MAs provides a broader view of market conditions.

• 100-period SMA: The 100-period SMA helps day traders keep an eye on the bigger picture and avoid trading against the primary trend. While not ideal for generating quick signals, it’s beneficial for avoiding major mistakes, such as shorting in a strong bull market.

• 200-period SMA: Widely regarded as the "granddaddy" of all moving averages, the 200-period SMA is commonly used by swing traders and long-term investors. Day traders can use it to determine the dominant long-term trend and filter out trades that go against it.

Combining Moving Averages: The Crossover Strategy

One of the most popular ways to use moving averages in day trading is through crossover strategies. A crossover occurs when a short-term MA crosses above or below a long-term MA, signaling a potential change in trend.

The Golden Cross and Death Cross

• Golden Cross: This occurs when a short-term MA crosses above a long-term MA, signaling a potential buying opportunity. For example, when the 50-period SMA crosses above the 200-period SMA, many traders see this as a bullish signal.

• Death Cross: The opposite of a golden cross, a death cross happens when a short-term MA crosses below a long-term MA. This is often viewed as a bearish signal, suggesting that prices may continue to fall.

While crossover strategies are powerful, they can produce false signals during choppy market conditions. To reduce the risk of false signals, some traders incorporate additional filters, such as RSI (Relative Strength Index) or MACD (Moving Average Convergence Divergence).

Optimizing Moving Average Settings Based on Market Conditions

No single moving average setting will work in all market conditions. That’s why successful day traders adjust their settings based on volatility, market type (trending or range-bound), and the asset being traded.

High-Volatility Markets

In highly volatile markets, such as those during major economic news releases, shorter-term MAs like the 5 or 9-period EMA are more effective. These allow you to react swiftly to rapid price changes, but they also carry the risk of generating more false signals due to their sensitivity.

Low-Volatility Markets

When the market is moving sideways or in a narrow range, longer-term MAs like the 50 or 100-period SMA are more appropriate. They help avoid being whipsawed by minor price fluctuations and provide a clearer indication of significant market trends.

Best Moving Average Settings for Different Assets

Different assets have different levels of volatility and liquidity, which means the ideal moving average settings vary between markets.

• Forex: In forex trading, where liquidity is high and price movements can be rapid, many day traders use the 5-period and 20-period EMAs. The 5-period EMA is used to spot entry points, while the 20-period EMA helps confirm the overall trend.

• Stocks: For stocks, the 9-period EMA and 50-period SMA are often used together. The 9-period EMA allows traders to capture short-term price momentum, while the 50-period SMA provides a reliable indication of the medium-term trend.

• Cryptocurrency: Given the high volatility of cryptocurrencies, many day traders prefer faster moving averages like the 5-period and 10-period EMAs. These MAs are more responsive to price swings, helping traders capitalize on sharp movements in assets like Bitcoin and Ethereum.

Final Thoughts

Choosing the right moving average settings is crucial for day traders. While there’s no one-size-fits-all solution, understanding how different settings work can help you fine-tune your strategy. For fast-moving markets, short-term EMAs like the 5 and 9-period are best. For more stable markets or longer-term trades, slower MAs like the 50 or 200-period SMA can provide greater reliability.

The key to success is finding the right balance between responsiveness and reliability, ensuring that your moving averages fit your trading style and the market conditions you’re working in.

Experiment with different settings, backtest your strategies, and don’t be afraid to adjust based on performance. After all, day trading is as much an art as it is a science.