Simple Moving Average Trading Basics
Trading beginners must understand technical indicators. An important trading indicator is the Simple Moving Average. It helps traders recognize patterns, discover entry and exit points, and make good trades.
MA Simple Moving Average?
The SMA averages stock closing prices. Its “Simple” calculation technique distinguishes it from other moving averages. Traders like SMAs for their simplicity and effectiveness.
A fixed number of closing prices is added and divided by the number of periods to get the SMA. Sum the closing prices of the last 10 days and divide by 10 to get the 10-day SMA average.
SMA Trading Uses?
SMA primarily determines trend direction. To determine an uptrend or downtrend, traders compare a security’s price to its SMA. A price above the SMA suggests an uptrend, while below it signals a downtrend.
SMA may indicate support and opposition. When the price approaches the SMA from below, it may recover as support. When price reaches SMA from above, it may stall or reverse as resistance.
SMA also helps traders detect crossovers. Crossovers are short-term SMAs above or below longer-term ones. The 10-day SMA crossing above the 30-day SMA may indicate a bullish trend.
Limitations of SMA
Traders benefit from SMA, but it has restrictions. It calculates the average using past data, making it trailing. Trading opportunities may be lost owing to delays.
SMA weights data points equally regardless of age. After a large event or price movement, past statistics may not reflect market attitude.
References and sources:
1. Investopedia: https://www.investopedia.com/terms/sma.asp
2. TradingView: https://www.tradingview.com/wiki/SMA
3. BabyPips: https://www.babypips.com/learn/forex/simple-moving-averages