What is a Smoothed Moving Average?

A Smoothed Moving Average is sort of a cross between a Simple Moving Average and an Exponential Moving Average, only with a longer period applied. The Smoothed Moving Average gives the recent prices an equal weighting to the historic ones. The calculation does not refer to a fixed period, but rather takes all available data series into account. This is achieved by subtracting yesterday’s Smoothed Moving Average from today’s price. Adding this result to yesterday’s Smoothed Moving Average, results in today’s Moving Average.

In a Simple Moving Average, the price data have an equal weight in the computation of the average. Also, in a Simple Moving Average, the oldest price data are removed from the Moving Average as a new price is added to the computation. The Smoothed Moving Average uses a longer period to determine the average, assigning a weight to the price data as the average is calculated. Thus, the oldest price data points in the Smoothed Moving Average are never removed, but they have only a minimal impact on the Moving Average, which is similar to how an Exponential Moving Average places more weight on the more recent data.

Lets see how a Smoothed Moving Average is calculated:

The first value for a Smoothed Moving Average is calculated as a Simple Moving Average (SMA):

SUM1 = SUM(CLOSE, N)
SMMA1 = SUM1/N

The second and succeeding moving averages are calculated according to this formula:

SMMA(i) = (SUM1-SMMA1+CLOSE(i))/N

Where:
SUM1 — is the total sum of closing prices for N periods;
SMMA1 — is the smoothed moving average of the first bar;
SMMA(i) — is the smoothed moving average of the current bar (except for the first one);
CLOSE(i) — is the current closing price;
N — is the smoothing period.

For the following example we will set the PERIOD equal to 3. We will assume the price of each day is the same as the day number for the price, thus, price 1 = 1, price 2 = 2, and so on.

In this case, for the first data point, it will be the same as a Simple Moving Price calculation. It is plotted on the chart at the third bar from the first bar used in the calculation.

SMMA = (PRICE 1 + PRICE 2 + PRICE 3)/PERIOD

SMMA = (1 + 2 + 3) / 3

= 6 / 3

= 2

The next value would be plotted at the fourth bar from the first bar used in the calculation.

SMMA = (PREVIOUS SUM - PREVIOUS AVG + PRICE 4) / PERIOD

For the second calculation of SMMA, PREVIOUS SUM is the sum of PRICE 1 + PRICE 2 + PRICE 3; and PREVIOUS AVG is the initial value of SMMA.

SMMA = (6 - 2 + 4) / 3

= 8 / 3

= 2.67

The next value would be plotted at the fifth bar from the first bar used in the calculation.

SMMA = (PREVIOUS SUM - PREVIOUS AVG + PRICE 5) / PERIOD

For the third and subsequent calculations of SMMA, values would be determined by subtracting the PREVIOUS AVG from the PREVIOUS SUM, adding the next more recent PRICE, then dividing by the PERIOD.

SMMA = (8 - 2.67 + 5) / 3

= 10.33 / 3

= 3.44

 

SMMA = (10.33 - 3.44 + 6) / 3

= 12.89 / 3

= 4.30

 

and so on...

The main use of this indicator is its smoothing out function. In this way, the Moving Average removes short-term fluctuations and allows us to view the prevailing trend.

Moving Averages work best in trending markets. A buy signal occurs when the short and intermediate term averages cross from below to above the longer term average. Conversely, a sell signal is issued when the short and intermediate term averages cross from above to below the longer term average. You can use the same signals with two Moving Averages, but most market technicians suggest using longer term averages when trading only two Smoothed Moving Averages in a crossover system.

Another trading approach is to use the current price concept. If the current price is above the Smoothed Moving Averages, you buy. Close that position when the current price crosses below either Moving Average. For a short position, sell when the current price is below the Smoothed Moving Average. Close that position when the current price rises above the Smoothed Moving Averages.

As you use Smoothed Moving Averages, do not confuse them with Simple Moving Average. A Smoothed Moving Average behaves quite differently from a Simple Moving Average. It is a function of the weighting factor or length of the average.

Lets compare a SMA with a SMMA on a graph:

 

SMA vs. SMMA Graph

 

As we see, the SMMA is more reactive to trend changes than the SMA, which produces a graph similar to an EMA. We will show you the difference between an EMA and an SMMA graph a bit later...

 


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