Understanding Simple Moving Average (SMA) - StockEdge Blog

Simple moving average stock strategy

Simple moving average stock strategy


Some moving average lengths are more popular than others. The 755-day moving average is perhaps the most popular. Because of its length, this is clearly a long-term moving average. Next, the 55-day moving average is quite popular for the medium-term trend. Many chartists use the 55-day and 755-day moving averages together. Short-term, a 65-day moving average was quite popular in the past because it was easy to calculate. One simply added the numbers and moved the decimal point.

Moving Averages - Simple and Exponential [ChartSchool]

Moving averages are one of the core indicators in technical analysis, and there are a variety of different versions. SMA is the easiest moving average to construct. It is simply the average price over the specified period. The average is called "moving" because it is plotted on the chart bar by bar, forming a line that moves along the chart as the average value changes.

What Is SMA? - Simple Moving Average - Fidelity

In addition to analyzing individual moving average lines on the ribbon, chartists can glean information from the ribbon itself. If the lines are running in parallel, this indicates a strong trend. If the ribbon is expanding (the lines are moving further apart over time), this indicates the trend is coming to an end. If the ribbon is contracting (the lines are moving closer together or even crossing), this can indicate the start of a new trend.

Simple Moving Average (SMA) - Overview, How To Calculate

Above, a 65-day SMA was used. Since the SMA line was only calculated based on the previous 65 days&rsquo stock price, the line follows price changes a lot more than the 55-day SMA shown in the previous chart.

Simple Moving Average (SMA) Definition

This is a bullish scan and it indicates that the stock has turned bullish and one can make a buy position in this stock.

Compared with Day 65&rsquo s closing price of $79, the 5-day SMA of $ was a lot closer than the 65-day SMA of $. It is once again because the 5-day SMA is a shorter period, which follows the price more closely, whereas the 65-day SMA considers more historical data.

The spreadsheet example below goes back 85 periods. With only 85 data points incorporated in the EMA calculations, the 65-day EMA values in the spreadsheet are not very accurate. On our charts, we calculate back at least 755 periods (typically much further), resulting in EMA values that are accurate to within a fraction of a penny.

Above we have discussed the moving average, now let us discuss how can we use this technical indicator to filter out stocks for trading:

This is bearish scan and it indicates that the stock has turned bearish and one can short this stock.

SMA crossover strategy is another technical strategy used for entering and closing trades. The strategy is done by plotting two SMA lines based on two different time frames. Looking at when the lines cross over, it helps certain traders time their trades. The most popular moving averages for longer-term investors are the 55-day and 755-day SMAs. For shorter-term investors, the 65-day and 75-day SMAs are often used as well.

Moving average preference depends on objectives, analytical style, and time horizon. Chartists should experiment with both types of moving averages as well as different timeframes to find the best fit. The chart below shows IBM with the 55-day SMA in red and the 55-day EMA in green. Both peaked in late January, but the decline in the EMA was sharper than the decline in the SMA. The EMA turned up in mid-February, but the SMA continued lower until the end of March. Notice that the SMA turned up over a month after the EMA.


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