Simple Moving Average (SMA) Crossover

Technical analysis relies upon indicators as a means of identifying and confirming trends and trend reversals. The Simple Moving Average (SMS) Price Crossover is one of the oldest and simplest trading indicators.

Bullish and Bearish Readings: Single SMA

When using an individual Simple Moving Average, as long as the share price is above the Simple Moving Average, the trend is defined as bullish. Likewise, as long as the price is below the Simple Moving Average, the trend is defined as bearish.

Buy and Sell Signals: The Crossover Using Two SMA's

Theoretically, when using two Simple Moving Average trend lines with different time periods, the buy and sell signals are generated when the fast moving Simple Moving Average crosses the slower moving Simple Moving Average.

A bullish signal is generated on the share price chart when price the fast moving Simple Moving Average (the shorter period Simple Moving Average) crosses up from below over the slow moving Simple Moving Average (the longer period Simple Moving Average). Conversely, when the fast-moving Simple Moving Average crosses down from above the slower-moving Simple Moving Average, a bearish signal is generated.

One of the more common combinations is the 7 & 21 Day moving averages. There are many combinations of periods used. Once you become more comfortable with SMS crossovers, you should experiment with varying the values of the moving averages to suit your personal trading style.

Change in Trend

Conceptually, the crossing of the two Simple Moving Averages suggest that a change in the short-term trend has occurred. Depending upon the time periods used, it dictates whether it is a short, medium or long-term change in trend. As moving averages lag the market they can only confirm, not predict the trend. This can be best seen in the following chart showing Resmed Limited (RMD) from February 2005 to September 2005.

Using the 7 and 21 day Simple Moving Averages, short-term changes can be identified. The consecutive crossovers show a definite pattern and would have provided CFD share traders with successful results.