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Independent Study Simple Moving Average
Independent Study Simple Moving Average
| Simple Moving Average |
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Simple Moving Averages As far as technical analysis goes, the moving average is one of the oldest and most popular tools. Simply stated, a moving average is the average price over a specific time. To calculate a moving average, you must first specify a time frame. Here is an example of a popular 50 day simple moving average.  By "simple" moving average, I mean one calculated by adding prices for the most current "n" time periods and then dividing by "n". If you are calculating the 50 period simple moving average, you would be using the average price for the last 50 bars, adding them together and dividing them by 50. When a new bar is created, it is added to the calculation and the 51st bar is dropped from the calculation. The moving average represents smoothed price action over the period of time indicated. Some technical analysts use the simple moving average as a barometer of investor expectations. When the moving average is above price and falling, investors expect price to keep falling. The opposite would hold true for an average that was below price and rising. It’s important to remember though that a moving average is a lagging indicator. It only tells you where the average price has been, not where price is, or where price may go. This example illustrates the fact that the simple moving average is a lagging indicator, and is always be behind current price action.  One of the most common ways to use simple moving averages is to combine two of them and use them to find a trend. In the following example, a 5 and 20 simple moving averages (SMA) are used. The trader would only take a trade if the 5 sma crossed the 20 sma and exceeded the previous high or low of the 5 sma on the previous crossover. This happened twice in this chart at A and B.  |