- Forex Basics
- Japanese Candlesticks
- What Are Japanese Candlesticks?
- Bodies, Wicks and Shadows
- The Doji Candlestick Pattern
- Candlestick Engulfing Pattern
- Hammers and Hanging Man
- Piercing Pattern and Dark Cloud
- Morning Star and Evening Star
- Harami Patterns
- Shooting Star and Inverted Hammer
- The Kicker Signal
- Three White Soldiers and Three Black Crows
- Three Inside Up and Three Inside Down
- Three Outside Up and Three Outside Down
- Concealing Baby Swallow
- Upside Gap Two Crows
- Advance Block
- Three Stars In The South
- Two Crows
- Unique Three River Bottom
- Moving Averages
- Elliott Wave Theory
- Oscillators/Indicators
What is a Simple Moving Average?
SMA Indicator and Technical Analysis
The simplest form of a moving average, aptly named the Simple Moving Average (SMA), is calculated by taking the arithmetic mean of a given set of values. The SMA Indicator may be used for technical analysis and to spot trends and reversals, however the Exponential Moving Average (EMA) is generally prefered by most traders. The number of values or data points used in the calculation is known as the "period".
For example, to calculate a basic 10-day moving average you would add up the closing prices from the previous 10 days and then divide the result by 10. This means the period value is 10.
For example, lets say the last 10 days closing prices were:
185, 180, 148, 133, 105, 89, 59, 47, 65, and 32.
The mean of these values (SMA) are calculated by adding them together and dividing by the number of data points, in this case 10.
185 + 180 + 148 + 133 + 105 + 89 + 59 + 47 + 65 + 32 = 1043
1043 / 10 = 104.3
Thus, 104.3 is the SMA for the last day. A new day closes at 35:
185 + 180 + 148 + 133 + 105 + 89 + 59 + 47 + 65 + 32 + 35 = 893
893 / 10 = 89.3
Even though the new day closed higher, the SMA dropped significantly because the first day was replaced by the last day. This is why it is known as a "moving average", since as each new time frame appears, the first data point in the time frame drops off. The period has the same value, it has just "moved" to the new day. As new values become available, the oldest data points must be dropped from the set and new data points must come in to replace them. Thus, the data set is constantly "moving" to account for new data as it becomes available.
What Does a Simple Moving Average Look Like?
Once the values of the SMA have been calculated, they are plotted onto a chart and then connected to create a moving average line. These curving lines are used as a technical indicator and common on the charts of technical traders, but how they are used can vary drastically (more on this later).
Fortunately, most charting software tools can do all the calculations for you so you can concentrate on technical analysis rather than math and even graph it as shown in the following example:
If you want to see a 50-day average instead, the same type of calculation would be made, but it would instead include the prices over the past 50 days.
It is possible to add more than one moving average to any chart by adjusting the number of time periods used in the calculation. These curving lines may seem confusing at first, but you'll grow accustomed to them as time goes on.
Lets compare a 10 day moving average (SMA[10]) to a 50 day moving average (SMA[50]). In the following graph, the blue line is the Simple Moving Average over the past 10 days, while the red line is the Simple Moving Average over the past 50 days:
As you can see, the more you increase the period (i.e. the more days you use for calculation), the smoother the Moving Average line becomes. How many days you calculate for a MA will depend on your trading method and what results you want from your MA data.
