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Moving Averages

This page is about the Simple Moving Average, the most common and popular of the moving averages. If you are interested in other versions of the moving average please select the links below:

The Simple Moving Average is arguably the most popular technical analysis tool used by traders. The Simple Moving Average (SMA) is often used to identify trend direction, but can be used to generate potential buy and sell signals. The SMA is an average, or in statistical speak – the mean. An example of a Simple Moving Average is presented below:

  • 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 days 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 (see: Support & Resistance).

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

Moving Average Acting as Support – Potential Buy Signal

When 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.

A Simple Moving Average can serve as a line of resistance as the chart of the DIA shows:

simple moving average acting as resistance

Moving Average Acting as Resistance – Potential Sell Signal

At times when price is in a downtrend and the moving average is in a downtrend as well, and price tests the SMA above 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 Simple Moving Average.

The examples above have been only using one Simple Moving Average; however, traders often use two or even three Simple Moving Averages. The potential advantages to using more than one Simple Moving Average is discussed on the next page.

The information above is for informational and entertainment purposes only and does not constitute trading advice or a solicitation to buy or sell any stock, option, future, commodity, or forex product. Past performance is not necessarily an indication of future performance. Trading is inherently risky. OnlineTradingConcepts.com shall not be liable for any special or consequential damages that result from the use of or the inability to use, the materials and information provided by this site. See full disclaimer.

Moving Average Crossovers

Moving average crossovers are a common way traders can 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.

The chart below of the S&P Depository Receipts Exchange Traded Fund (SPY) shows the 50-day Simple Moving Average and the 200-day Simple Moving Average; this Moving Average pair 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

Note how the long-term 200-day Simple Moving Average is in an uptrend; this often is 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 and contrastly, a trader might consider selling when the 50-day SMA crosses below the 200-day SMA.

In the chart above 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.

For those traders that want more confirmation when they use Moving Average crossovers, the 3 Simple Moving Average crossover technique might be used. An example of this is shown in the chart below of Wal-Mart (WMT) stock:

three simple moving average crossover buy and sell signals

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; however, usually a trader would not place an actual buy or sell order then.
  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 are provided below:

  • A more conservative approach might be to wait until the middle SMA (20-day) crosses over the slower SMA (50-day); but this is basically a two SMA crossover technique, not a three 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 and 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 (see: Exponential Ribbon).

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 (see: MACD). Other moving averages deserve careful consideration in a trading plan:

The information above is for informational and entertainment purposes only and does not constitute trading advice or a solicitation to buy or sell any stock, option, future, commodity, or forex product. Past performance is not necessarily an indication of future performance. Trading is inherently risky. OnlineTradingConcepts.com shall not be liable for any special or consequential damages that result from the use of or the inability to use, the materials and information provided by this site. See full disclaimer.

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