What is the Simple Moving Average
Key Points
- SMA calculates the average closing price of an asset over a set period to smooth out price data.
- Short-term SMAs react quickly, while long-term SMAs show overall trends.
- Traders use SMA for buy/sell signals and crossover strategies like Golden Cross and Death Cross.
- SMA is a lagging indicator but helps identify trends, support, and resistance levels.
A simple moving average (SMA) is a technical analysis indicator that smooths out price data by calculating the average closing price of the asset over a specified number of time periods. It helps investors understand market trends, support, and resistance levels by creating a line on the chart that moves with each new period’s data that making it easier to visualize and interpret.
How Do SMAs Work?
We can calculate SMA by selecting a period of time frame and finding the average closing price during that period. The formula is simple: you add the closing prices of the time frame you’re interested in and then divide the total by the number of periods.
Source: TradingView
How to Calculate SMA
Suppose we wish to calculate the 10-day SMA. The closing prices of each day are $10, $15, $16, $14, $25, $19, $11, $17, $13, and $12. The SMA is calculated as follows:
Simple Moving Average (SMA) Formula
SMA = (A₁ + A₂ + … + Aₙ) / n
Where:
- Aₙ = Price of the asset at period n
- n = Total number of periods
The Simple Moving Average calculates the average of asset prices over a specified number of periods, helping to smooth out price data and identify trends.
SMA = ( 10 + 12 + 13 + 14 + 15 + 16 + 17 + 11 + 19 + 25 ) / 10 = 15.2. This means that the 10-day SMA is 15.2$. As each day passes, the oldest prices are dropped and the most recent prices are added to the calculation, making it move as prices change.
SMA smoothes out price data by identifying short-term fluctuations and highlighting long-term trends. A short-period SMA, like a 5-day SMA, is more vulnerable to the price changes compared to a long-term SMA, like a 200-day SMA, which provides a larger view of the overall trend.
SMAs’ Role in Crypto Trading
SMAs are used to identify potential buy or sell signals in crypto trading. Let’s take bitcoin for instance, if the current price of bitcoin is above the 50-day SMA, then it is an indication that it is the beginning of an Uptrend, and if it’s below the 50-day SM, then it’s probably a continuation of a downtrend, indicating a potential sell signal.
SMAs are used in many trading strategies. For example, two SMAs of different lengths can be used to identify crossovers. Traders often use a 50-day SMA or a 200-day SMA to find the Golden Cross – A bullish signal that occurs when a shorter SMA (50-day) crosses the longer SMA (200-day). Similarly, there is a bearish signal, known as a death cross, that occurs when the shorter SMA goes below the longer SMA.
- 50-day SMA crosses above 200-day SMA → Golden Cross (Bullish)
- 50-day SMA crosses below 200-day SMA → Death Cross (Bearish)
Is a higher SMA better?
While SMA is easy to calculate, SMA is not the only tool that traders use for predicting the price flow. There is also the Exponential Moving Average (EMA)
This gives more importance to more recent prices by adding weights to them, allowing them to react quickly to price changes. SMA treats all prices equally, providing a smoother price trend analysis, but it is lagging compared to EMA.
Advantages of SMA:
- Simplicity: Easy to understand and calculate
- Trend identification: It helps in identifying trends and visualizing price movements.
- Flexibility: Can be used in many trading strategies, providing a dynamic support level in an uptrend, and can be used as a resistance level in a downtrend.
Conclusion
Simple moving average, or SMA, is a technical analysis tool widely used by crypto traders and stock market analysts. It is used to identify trends based on price data and a specific time frame. In crypto, SMA’s role is to predict the potential Buy and sell signals. SMA can also be used in various other trading strategies.
The SMA is a lagging indicator, based on past data. This makes it quick to react to new prices. Yet, it smooths out the price swings, giving a clearer picture of the trend. Many traders use it to spot support and resistance levels.
FAQs
If the stock is above the 50-day SMA, and the SMA is moving higher, then the Intermediate-term is generally considered to be going up.
The average price of an asset over a specified period of time.
The simple moving average (SMA) gives you the price average over a specified period of time. The exponential moving average (EMA) gives a higher weighting to recent prices.
A long-term indicator that helps traders distinguish between sustained uptrends and downtrends.
The SMA is a lagging indicator, based on past data. This makes it quick to react to new prices. Yet, it smooths out the price swings, giving a clearer picture of the trend. Many traders use it to spot support and resistance levels.
