This page is about the simple moving average (SMA), the most common and popular of the moving averages in technical analysis.
If you are interested in other versions of the moving average, you can skip to the following links:
- Adaptive Moving Average
- Exponential Moving Average (EMA)
- Triangular Moving Average
- Typical Price Moving Average (Pivot Point)
- Weighted Moving Average (WMA)
What Is the Simple Moving Average?
The simple moving average (SMA) is arguably the most popular technical analysis tool used by traders. It’s often used to identify trend direction, but can also be helpful to generate potential buy and sell signals.
The SMA is an average, or in statistical speak, the mean.
SMA Acting as Support
Potential Buy Signal
When the price is in an uptrend and subsequently the moving average is in an uptrend – and the moving average has been tested by price and price has bounced off the moving average a few times (i.e. the moving average is serving as a support line) – then a trader might buy on the next pullbacks back to the simple moving average.
The chart below of the Dow Jones Industrial Average exchange-traded fund (DIA) shows a 20-day simple moving average acting as support for prices.
SMA Acting as Resistance
Potential Sell Signal
At times when the price is in a downtrend and the moving average is in a downtrend as well – and price tests the SMA and is rejected a few consecutive times (i.e. the moving average is serving as a resistance line) – then a trader might sell on the next rally up to the SMA.
This chart of the DIA shows how an SMA can serve as a line of resistance:
The above examples use only one SMA. However, traders often use two or even three simple moving averages.
Simple moving average crossovers are a common way for traders to use moving averages.
50/200 Day SMA Crossover
This chart of the S&P Depository Receipts exchange-traded fund shows the 50-day SMA and the 200-day SMA – a moving average pair that is often looked at by big financial institutions as a long-range indicator of market direction.
Note how the long-term 200-day SMA is in an uptrend. This is often interpreted as a signal that the market is quite strong.
A trader might consider buying when the shorter-term 50-day SMA crosses above the 200-day SMA. Contrarily, a trader might consider selling when the 50-day SMA crosses below the 200-day SMA.
In the above chart of the S&P 500, both potential buy signals would have been extremely profitable, but the one potential sell signal would have caused a small loss.
3 SMA Crossover Strategy
Traders that want more confirmation when they use moving average crossovers, might use the 3 simple moving average crossover technique.
This chart of Wal-Mart (WMT) stock acts as an example:
The 3 simple moving average method could be interpreted as follows:
- The first crossover of the quickest SMA (in the example above, the 10-day SMA) across the next quickest SMA (20-day SMA) acts as a warning that prices might be reversing trend. A trader would usually not place an actual buy or sell at this time.
- Thereafter, the second crossover of the quickest SMA (10-day) and the slowest SMA (50-day), might trigger a trader to buy or sell.
There are numerous variants and methodologies for using the 3 simple moving average crossover method. Some examples are:
- A more conservative approach might be to wait until the middle SMA (20-day) crosses over the slower SMA (50-day). However, this is basically a 2 SMA crossover technique, not a 3 SMA technique.
- A trader might consider a money management technique of buying a half size when the quick SMA crosses over the next quickest SMA. He/she would then enter the other half when the quick SMA crosses over the slower SMA.
- Instead of halves, buy or sell one-third of a position when the quick SMA crosses over the next quickest SMA, another third when the quick SMA crosses over the slow SMA, and the last third when the second quickest SMA crosses over the slow SMA.
A moving average crossover technique that uses 8+ moving averages (exponential) is the moving average exponential ribbon indicator.
Moving Average crossovers are often viewed tools by traders. In fact, crossovers are often included in the most popular technical indicators including the moving average convergence divergence (MACD) indicator.
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Learn more about technical analysis charting concepts and strategies, including:
Our guide to understanding candlestick charts is another good resource.
For all the basics on how to trade commodities, our introduction to commodity trading is helpful.