Price / SMA Crossovers

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Price / SMA Crossovers

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Moving Averages (MA) help identify price trends and potential support and resistance levels.   Two main MA types are the simple and exponential.

Simple Moving Averages (SMA) are calculated by taking an average of the closing prices for X-number of periods depending on the SMA used.  SMA (5) uses 5 periods, etc.

Price/SMA cross occurs when the price crosses an SMA, either above (bullish) or below (bearish).  Since Price moves faster than a moving average (SMA), this type of cross typically occurs before an SMA/SMA cross.  Hence, Price/SMA cross is more sensitive and provides earlier indications but can also give more false readings for trend developments.

SMAs change slower than EMAs and thus is better for traders with longer time frames.  EMA reflects price changes faster and thus is better for short-term traders.  Also important are the time frames used to calculate the SMAs and EMAs – long-term traders should use longer time frames (60+ periods), medium-term traders should use 20-60 periods while short-term trades should use 5-20 periods.

Support and resistance levels.  MAs, especially SMAs, can also be used as support and resistance levels.  During strong up(down) trends, prices tend to bounce off of the support and resistance lines.  When prices break-through the support and resistance lines, it can indicate consolidation or a reversal.