Simple Moving Average - SMA Indicator

What is Simple Moving Average

Generally, the term ''Moving Average'' refers to Simple Moving Average. The latter does not predict price direction; it is a lagging indicator and rather defines the current direction. It is an indicator that shows the average value of the instrument's price over a specified period of time.

Simple Moving Average Example

An SMA is calculated by adding the closing price of the instrument to the number of time periods and then dividing the total number by the number of time periods. The result will be the average price of the instrument over a certain time period. Thus, in order to calculate a 10-day SMA, it's necessary to add closing prices over a 10-day period and divide the total number by 10. As the term ''moving'' implies, prices move according to the point on the chart. This means that always a new calculation is needed that can correspond to the time period of the average used. Thus, you can recalculate a 10-day average by adding the new day and missing out the 10th day and so on.

Though simple moving average is used by most traders and analysts, it is criticized by two reasons. The first criticism is that only the time period covered by the average is taken into consideration. And secondly, the SMA gives equal weight to each day's price.

Nevertheless, Simple Moving Average has become a preferred method for tracking prices due to its simplicity and quick calculation. By the same simplicity early market analysts performed the market analysis without using complicated chart metrics that are widely applied today. They mainly relied on market prices as the main means of tracking trends and market direction. This process was boring but was confirmed to be profitable and reliable, and up till now it continues to be a popular technical analysis tool extensively used by most traders.

Lihat juga