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BLOG GUIDE TECHNICAL ANALYSIS |
SMA - Simple Moving AverageThis is the first in my series of research into the various technical analysis studies, and why not start off with the simplest, the Simple Moving Average (most often it's just abbreviated to SMA). It really is a very simple study, basically you choose the number of periods to sample and it calculates a moving average across the number of periods you specify. The fewer periods you use the quicker the moving average responds to changes in price, the more periods you use then the slower it changes. The SMA is calculated by adding up the closing price for the last X number of time periods then dividing the total by the number of periods (standard way to calculate an average). How to use the Simple Moving Average From what I could find, most traders use a combination of short term and long term Simple Moving Averages. When the short term line crosses to above the long term average line then it can signal the start of an up trend, and the opposite for downtrends. Here's a sample daily chart that has 2 simple moving averages, the red line is the long term SMA set to 50 periods, the blue line is a 15 period SMA (the short term one).
To me it looks like it can give some indication though it's not really all that great for picking a trend, seems to be almost over by the time the lines cross. Maybe it works better for really long term trends? I'm sure the Weighted Moving Average and Exponential Moving Average were designed to improve upon the Simple Moving Average, so I will study those next.
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