Simple Moving Average
A simple moving average (or SMA) is also known as arithmetic moving average.
The (SMA) is an average of the closing price of a crude over a specified number of periods. Here the moving average changes based on the changes in crude price.
The above chart shows the moving averages for crude oil
Simple Moving Average strategy
1) 5 day moving average ( green line )
2) 10 days moving average (Blue Line )
Based on the chart above: The average of the closing price for the past five days is nothing but the crude’s five day moving average. We can notice that, as there is advancement in “Moving average” the previous data is dropped.
The short-term fluctuations in the crude prices are balanced by the (MA). This helps us to get a clearer picture of the market trend.
We can notice that, as the crude price increases, the short-term moving average crosses over the long term (MA). Similarly, when the crude price falls, the long-term moving average crosses over the short-term moving average. This crossover shows the change in the price trends.
Let us remember that, the (SMA) serves us as both, Support & Resistance level.
Support Level - When (MA) is below the crude’s current market price.
Resistance Level – When (MA) is above the crude’s current market price.
Crossover of five-day & ten day (MA) is used as entry & exit points by some traders.
When the five-day(SMA) crosses over the ten-day (SMA), it’s used as an “entry signal”. When the ten-day (SMA) crosses over the five-day (SMA), it’s used as an “exit signal” in an “uptrend” and vice versa in a “downtrend”.