Simple moving averages (SMA) are used in many different technical indicators and can also serve as a standalone tool for analyzing price movement.
SMA’s evenly value data points across a specific timeframe and do not weight any data points based on additional variables (ex. Increasing the value of more recent data in the average).
Below, you can see a 14 day SMA over the S&P 500 (ES) on a futures trading chart:
Use Simple Moving Averages to Trade Bullish Buy Signals
A simple moving average could signal a bullish price trend reversal occurring in the near future if it breaches a financial instrument’s price action. A bullish breach of the SMA can also be viewed as a potential buy signal. An exit or sell signal can be identified if the price trend is breached for a second consecutive time, but to the downside.
Use Simple Moving Averages to Trade Bearish Sell Signals
A simple moving average could signal a bearish price trend reversal occurring in the near future if it breaches a financial instrument’s price action. A bearish breach of the SMA can also be viewed as a potential sell signal. An entry or buy signal can be identified if the price trend is breached for a second consecutive time, but to the upside.
How SMAs are Used with Other Technical Indicators
The 14 day SMA is also used as a day trading indicator for future price movement. A low volatility period in the market can be identified when Bollinger Bands® are tighter around the 14 day SMA, signaling a price move could potentially occur in the near future. A high volatility period in the market can be identified when Bollinger Bands® are wider around the 14 day SMA, signaling a price move is less likely to occur in the near future.
Looking at the S&P 500 (ES) chart below, the 14 Day SMA is located between the upper and lower Bollinger Band:
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