Before you dive into the content, check out this video on moving average crossover strategies. The video is a great precursor to the strategies and more advanced topics detailed in this article. So, what is the simple moving average? Once you begin to peel back the onion, the simple moving average is anything but simple. This article will cover a host of topics; to name a few, we will discuss the simple moving average formula, popular moving averages 5, 10, , some real-life moving average examples and a few crossover strategies, and my personal experience with the indicator.

The simple moving average SMA is the most basic of the moving averages used for trading. The simple moving average formula is calculated by taking the average closing price of a stock over the last "x" periods. Let's take a look at a simple moving average example with MSFT. The last five closing prices for MSFT are:. To calculate the simple moving average formula you divide the total of the closing prices and divide it by the number of periods.

I mean every indicator is based on math, but it's not some proprietary calculation with trademark requirements. Generally speaking in life, the things that are of most value are given as gifts to help the world become a better place.

If you are thinking you will come up with some weird 46 SMA to beat the market let me stop you now. It is important to use the most common SMAs as these are the ones the majority of traders will be using on a daily basis. While I do not advocate you following everyone else, it is important to know what other traders are looking at for clues.

Below are the most common SMAs used in the market:. This shorter the SMA the more signals you will receive when trading. The best way to use a 5-SMA is as a trade trigger in conjunction with a longer SMA period. Beyond SMA you are basically looking at primary trends. Most investors will look for a cross above or below this average to represent if the stock is in a bullish or bearish trend.

Most traders will tell you to trade simple moving average crossovers and the profits will fall from the heavens. Unfortunately, this is not accurate. Oftentimes stocks will tick over or under moving averages to only continue in the primary direction. This will leave you on the wrong side of the market and down on your position. Below are a few ways to make money trading the SMA. Now that I have given you enough doubt before even attempting to trade with the simple moving average, let's review a few ways to make money with the SMA.

The simple moving average is probably one of the most basic forms of technical analysis. Even hard core fundamental guys will have a thing or two to say about the indicator. Below is a play-by-play for using a moving average on an intraday chart. In the below example, we will cover staying on the right side of the trend after putting on a long position. I know this is a few years ago, but the market is destined to repeat prior setups; it's all human nature at the end of the day.

Notice how the stock had a breakout on the open and closed near the high of the candlestick. A breakout trader would use this as an opportunity to jump on the train and place their stop below the low of the opening candle. At this point, you can use the moving average to gauge the strength of the current trend. In this chart example, we are using the period simple moving average.

Far too many traders have tried to use the simple moving average to predict the exact sell and buy points on a chart. A trader might be able to pull this off using multiple averages for triggers, but one average alone will not be enough. So save yourself the time and headache and use the averages to determine the strength of the move. Now take another look at the chart. Do you see how the chart is starting to rollover as the average is starting to flatten out? A breakout trader would want to stay away from this type of activity since the money in this example grows as the stock increases in price.

Now again, if you were to sell on the cross down through the average, this may work some of the time, but over time you will end up losing money after you factor in commissions. If you don't believe me, try simply buying and selling based on how the price chart crosses up or under a simple moving average. Remember, if it was that easy, every trader in the world would be making money hand over fist.

I like to call this the holy grail setup. This is the setup you will see in books and seminars.

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Simply buy on the breakout and sell when the stock crosses down beneath the price action. The below is an intraday chart of Sina Corporation SINA from June 24, Look at how the price chart stays cleanly above the period simple moving average. The brain is a funny thing. I remember seeing a chart like this when I first started out in trading and then I would buy the setup that matched the morning activity.

I would look for the same type of volume and price action, only to later be smacked in the face by reality when my play did not trend as well. This is the true challenge with trading, what works well on one chart, will not work well on the other. Remember, the SMA worked well in this example, but you can not build a money making system off one play. Another way to trade using the simple moving average is to go counter to the trend.

One of the more higher probability plays is to counter. There have been a number of studies regarding gaps. Another validation a trader can use when going counter is a close under or over the simple moving average. After the gap, the stock trended up strongly. You have to be very careful with counter trade setups.

If you are on the wrong side of the trade, you and others with the same position will be the fuel for the next leg up. Now let's jump forward one day to July 1, But what about moving average crossovers as a trigger for entering and closing trades?

Let me take a clear stance on this one and say I'm not a fan of this strategy. First, the moving average by itself is a lagging indicator, now you layer in the idea that you have to wait for a lagging indicator to cross another lagging indicator is just too much delay for me.

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If you look around the web, one of the most popular simple moving averages to use with a crossover strategy is the 50 and day. When the 50 simple moving average crosses above the simple moving average it generates a golden cross. Conversely, when the simple moving average crosses beneath the simple moving average it creates a death cross. I only mention this so you are aware of the setup, which may be applicable for long-term investing.

Since Tradingsim focuses on day trading let me at least run through some basic crossover strategies. The first thing to know is you want to pick two moving averages that are somehow related to each other. For example, 10 is half of Or the 50 and are the most popular moving averages for longer term investors.

The second thing is coming to understand the trigger for trading with moving average crossovers. A buy or sell signal is triggered once the smaller moving average crosses above or below the larger moving average. Isn't that just a beautiful chart? The period SMA is the red line and the blue is the period. Let's take a look when a sell action is triggered. Now in both of these examples, you will notice how the stock conveniently went in the desired direction with very little friction.

Well, this is the furthest thing from reality. If you look at moving average crossovers on any symbol you will notice more false and sideways signals than high return ones. This is because most of the time stocks on the surface move in a random pattern. Remember people, it is the job of the big money players to fake you out at every turn in order to separate you from your money.

How to Trade with the Simple Moving Average - 3 Winning Strategies

With the rise of hedge funds and automated trading systems , for every clean crossover play I find, I can probably show you another dozen or more that don't play out well. This again is why I do not recommend the crossover strategy as a true means of making money day trading the markets.

Now that you have all the basics, let me walk you through my experience day trading with simple moving averages. You could be saying to yourself, "Why do I care about this guy's experience?

Mine will be different? In theory, yes, but there are likely parallels between our paths and I can hopefully help you avoid some of my mistakes.

I felt like volume and moving averages were all I needed to keep me safe when trading. I read all of the books and browsed tons of articles on the web from top "gurus" about technical analysis. I then took a look at the charts and from what I could see, price respected the period moving average all the time.

I didn't know at this point you see what you want to in charts and for every winning example, there are likely dozens that have failed. I felt that if the stock closed below the simple moving average and I was long, I should look to get out.

But, if the stock could stay above the average, I should just hold my position and let the money flow to me.

I'm not even going to worry about giving you the ticker of the above chart because it's honestly irrelevant. The pattern I was fixated on was a cross above the period moving average and then a rally to the moon. I remember feeling such excitement of how easy it was going to be to make money day trading this simple pattern. Now, shifting gears for a second; anyone that knows me knows that I have a strong analytical mind. At this point in my journey, it's about the summer of I am placing some trades and trying different systems, but nothing with great success.

I am using the period simple moving average in conjunction with bollinger bands and a few other indicators. So, after reviewing my trades, I, of course, came to the realization that one moving average is not enough on the chart.

The need to put more indicators on a chart is always the wrong answer for traders. But, we must go through this process in order to come out of the other side. I felt that if I combined a short-term, mid-term and long-term simple moving average, I could quickly validate each signal. In the above example, the blue line is a 5-period SMA, the red line is a period SMA and the purple line is a period SMA.

You, of course, are welcomed to use any setting that works best for you, but the point is each moving average should be a multiple or two from one another to avoid chaos on the chart. I used the shortest SMA as my trigger average. When it crossed above or below the mid-term line I would have a potential trade. The sign I needed to pull the trigger was if the price was above or below the long-term moving average. So, going back to the chart the first buy signal came when the blue line crossed above the red and the price was above the purple line.

This would have given us a valid buy signal. Then after a nice profit, once the short line crossed below the red line, it was our time to get out. Notice that the price was still above the purple line long-term , so no short position should have been taken. This way we were not always in a long or short position, just because the price is closing above or below a moving average. Looking back many years later, it sounds a bit confusing, but I do have to compliment myself on just having some sort of a system.

At this point of my journey, I am still in a good place. That's what I was hoping to represent with the green smiley faces. The green also represents the expectation of the money flow as well. It's around late summer at this point and I was ready to roll out my new system of using three simple moving averages. It became apparent to me rather quickly that this was much harder than I had originally anticipated. Once I landed on trading volatile stocks , they either gave false entry signals or did not trend all day.

This level of rejection from the market cut deeply. I remember staring at the screen thinking, "Why is this not working? Charts began to look like the one below and there was nothing I could do to prevent this from happening. Anyone that has been trading for longer than a few months using indicators at some point has started tinkering with the settings.

Well, I took that concept to an entirely different level. I was using Tradestation at the time trading US equities and I began to run combinations of every time period you can imagine. As you can see, these were desperate times. I was running all sorts of combinations until I felt I landed on one that had decent results.

The goal was to find an Apple or another high volume security I could trade all day using these signals to turn a profit. Similar to my attempt to add three moving averages after first settling with the period as my average of choice, I did the same thing of needing to add more validation checks this time around as well. So, instead of just moving forward with the settings I had discovered based on historical data which is useless the very next day, because the market never repeats itself , I wanted to outsmart the market yet again.

It's important to note that I was feeling pretty good after all this analysis.

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I felt that I had addressed my shortcomings and displacing the averages was going to take me to the elite level. For those of you not familiar with displaced moving averages, it's a means for moving the average before or after the price action. I'm not going to drain this concept in this article, as the focus of this discussion is around simple moving averages.

The point is, I felt that using the averages as a predictive tool would further increase the accuracy of my signals. This way I could jump into a trade before the breakout or exit a winner right before it fell off the cliff. To illustrate this point, check out this chart example where I would use the same simple moving average duration, but I would displace one fo the averages to jump the trend.

Displaced Moving Average Sell Signal. The reality is that I would jump into trades that would never materialize or exit winners too soon before the real pop. I think this feeling of utter disgust and wanting to never think about trading again is part of the journey to consistent profits.

Going back to my journey, at this point it was late fall, early winter and I was just done with moving averages. This is clearly reflected in my red unhappy face. Technical indicators and systems lead to more indicators to try and crack the ever elusive stock market. I would try one system one day and then abandon it for the next hot system.

This process went on for years as I kept searching for what would work consistently regardless of the market. This included me trying every indicator from bollinger bands, macd , slow stochastics - you name it, I tried it. If you get anything out of this article, do not make the same mistake I did with years of worthless analysis.

You will make some traction, but it's a far better use of your time to zone in on yourself and how you are perceiving the market. After many years of trading, I have landed on the period simple moving average. At times I will fluctuate between the simple and exponential, but 20 is my number. This is because I have progressed as a trader from not only a breakout trader, but also a pullback trader. I use the period moving average as a means to gauge market direction , but not as a trigger for buying or selling.

At times a stock will crack right through the average, but I don't panic that a sell-off is looming. I just wait and see how the stock performs at this level. It's funny to think that I have essentially reverted back to exactly what I was looking at over 10 years ago - one average. It wasn't all death and gloom along the way and the simple moving average is just one component of my trading toolkit.

In other words, mastering the simple moving average was not going to make or break me as a trader. However, understanding how to properly use this technical indicator has positioned me to make consistent profits. If you haven't already figured it out, the simple moving average is not an indicator you can use as a standalone trigger. Now, that doesn't mean that the indicator can't be a great tool for monitoring the direction of a trend or helping you determine when the market is getting tired after an impulsive move.

Think of the SMA as a compass. If you want detailed coordinates you will need other tools, but you at least have an idea of where you are headed. Learn to Day Trade 7x Faster Than Everyone Else Learn How. Free Trial Log In. How to Trade with the Simple Moving Average. Popular Simple Moving Averages. Basic Rules for Trading with the SMA. Simple Moving Average Example. Simple Moving Average - When to Sell.

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