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Simple Moving Average - SMA Definition #stockmarket #education #stockeducation

What is Simple Moving Average - SMA: A simple moving average (SMA) is an arithmetic moving average calculated by adding recent closing prices and then dividing that by the number of time periods in the calculation average. A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by that same number of periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.

The Formula For SMA Is:

\begin{aligned} &\text{SMA}=\dfrac{A_1 + A_2 + ... + A_n}{n} \\ &\textbf{where:}\\ &A_n=\text{the price of an asset at period } n\\ &n=\text{the number of total periods}\\ \end{aligned}

Example of Calculating The SMA:

Let's look at a simple example of how to calculate the simple moving average of a security with the following closing prices over 15 days:
Week 1 (5 days) – 20, 22, 24, 25, 23
Week 2 (5 days) – 26, 28, 26, 29, 27
Week 3 (5 days) – 28, 30, 27, 29, 28
A 10-day moving average would average out the closing prices for the first 10 days as the first data point. The next data point would drop the earliest price, add the price on day 11 and take the average, and so on. Likewise, a 50-day moving average would accumulate enough data to average 50 consecutive days of data on a rolling basis.
What Does The Simple Moving Average Tell You: A simple moving average is customizable in that it can be calculated for a different number of time periods, simply by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods, which gives the average price of the security over the time period. A simple moving average smooths out volatility, and makes it easier to view the price trend of a security. If the simple moving average points up, this means that the security's price is increasing. If it is pointing down it means that the security's price is decreasing. The longer the time frame for the moving average, the smoother the simple moving average. A shorter-term moving average is more volatile, but its reading is closer to the source data.

Analytical Significance:

Moving averages are an important analytical tool used to identify current price trends and the potential for a change in an established trend. The simplest form of using a simple moving average in analysis is using it to quickly identify if a security is in an uptrend or downtrend. Another popular, albeit slightly more complex analytical tool, is to compare a pair of simple moving averages with each covering different time frames. If a shorter-term simple moving average is above a longer-term average, an uptrend is expected. On the other hand, a long-term average above a shorter-term average signals a downward movement in the trend.

Popular Trading Patterns:

Two popular trading patterns that use simple moving averages include the death cross and a golden cross. A death cross occurs when the 50-day simple moving average crosses below the 200-day moving average. This is considered a bearish signal, that further losses are in store. The golden cross occurs when a short-term moving average breaks above a long-term moving average. Reinforced by high trading volumes, this can signal further gains are in store.

What is a EMA & SMA line and how to use them | Free stock course | Stock Market By: James Mason

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