Simple Moving Average Made Simple: What You Need to Know

The simple moving average (SMA) is a technical indicator used by day traders giving you the average stock price over time. the Moving Average (MA) is widely used and smooths out price by filtering the "noise" from short term price fluctuations.Below is an example of a 20 Period SMA on a 5 minute chart of Tesla.

How to Calculate The Simple Moving Average

You Calculate the closing price of the stock for a period of time (in example above is 20 Periods) then you divide it by the number of periods. The last price of Tesla is at 1546 and the 20 SMA is 1511.64

Calculate SMA Example


Let's calculate the 5 SMA for a stock price.
The last closing price for the stock was $5, $6, $7, $8, $9
The total of the last 5 Periods equals (5+6+7+8+9) = 35. You divide 35 by 5 to get an SMA of $7.

Buying Below or Above SMA?

If you were to buy the stock when it is above the SMA, you are essentially buying the stock higher than those that bought it before you during that period. If you were to buy it below, then you are essentially buying the stock at a lower price than those who purchased before you. This could be beneficial if you are looking to buying an up trending stock and would like a good price to enter at. A moving average can also act as support or resistance because you'll find buyer or sellers of the trend in those areas. Below you can see the support on Tesla's Daily Chart

Common Simple Moving Averages

You can use any period you would like on the SMA, Just keep in mind the the longer the period is, the slower it reacts with current price changes. The most common moving averages are 10, 20, 50, 100 and 200. For Investing is the 50 day SMA and the 200 day SMA.

Moving Average Crossover Trading Strategy

Price Crossover- Main MA strategy is when the price crosses above or below a moving average to signal a potential change in the trend.

2 MA Crossover- Use two moving averages on a chart with one being shorter time frame and the other being a longer time frame. When the shorter term MA crosses above the longer term MA, it is a buy signal. When the shorter term MA crosses below the longer term MA it is a sell/short signal. A common MA Crossover is using the 20 and 200 SMA.

Exponential Moving Averages
We've been talking about the SMA, there is also another one called the Exponential Moving Average (EMA). The difference it that the EMA applies more weight on the Most recent prices. EMA's react more quickly to price changes than the SMA does.

 

 

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