What Is the Simple Moving Average? (And How Do Traders Interpret It)

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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:

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 Example

The prices for the last 5 days were 25, 28, 26, 24, 25. The average would be (25+28+26+26+27)/5 = 26.4.

Therefore, the SMA line below the last day’s price of 27 would be 26.4. In this case, since prices are generally moving higher, the SMA line of 26.4 could be acting as support.

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.

simple moving average acting as support for prices
Please note, this is an example trade – not a recommendation.

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:

simple moving average acting as resistance
Please note, this is an example trade – not a recommendation.

The above examples use only one SMA. However, traders often use two or even three simple moving averages.

SMA Crossovers

Simple moving average crossovers are a common way for traders to use moving averages.

A crossover occurs when a faster moving average (i.e. a shorter period moving average) crosses either above a slower moving average (i.e. a longer period moving average) – which is considered a bullish crossover – or below – which is considered a bearish crossover.

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.

moving average crossover of 50 day and 200 day simple moving average
Please note, this is an example trade – not a recommendation.

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.

Keep in mind that the 50-day/200-day simple moving average crossover is a very long-term strategy.

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:

three simple moving average crossover buy and sell signals
Please note, this is an example trade – not a recommendation.

The 3 simple moving average method could be interpreted as follows:

  1. 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.
  2. 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.

Where to Trade Commodities Using Technical Analysis

If you’re interested in trading using technical analysis indicators like the simple moving average, have a look at our reviews of these regulated brokers available in .

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. <b>Between 53.00%-89.00% of retail investor accounts lose money when trading CFDs.</b> You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Further Reading

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.

Also, take a look at our guides on stock, CFD, and commodity brokers to find out which online trading platforms are available in .

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