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What is Simple Moving Average (SMA)

Simple Moving Average (SMA) is one of the most popular technical indicators used by investors and stock traders to predict market trends. SMA calculates the average of stock prices over a certain period to determine whether the stock price trend is up or down.
 
However, many novice investors and traders are still confused about how to use SMA to predict stock market trends. Therefore, we will provide a brief guide on how to use SMA to predict stock market trends.
 
By understanding the Simple Moving Average and how to use it, you can help increase your profits in trading or investing. In the following section, we will discuss how the Simple Moving Average works and examples of its use.
simple moving average is: function and use

Simple Moving Average Calculation

A. How to calculate Simple Moving Average

To calculate the Simple Moving Average (SMA), we must first determine the time period we want to use. This time period is related to the number of periods we will use to calculate the average stock price. For example, if we want to calculate SMA with a period of 50 days, then we must take the stock price in the last 50 days.
 
The next step is to add up the stock prices over the period we have determined and divide the result by the number of periods. For example, if we want to calculate the 50-day SMA, then we must add up the stock prices over the last 50 days and divide the result by 50. This is the result of the 50-day SMA that we are looking for.
 
For example, if the stock price on days 1 to 50 is as follows:
 
100, 110, 120, 130, 140, 150, 160, 170, 180, 190, 200, 210, 220, 230, 240, 250, 260, 270, 280, 290, 300, 310, 320, 330, 340, 350, 360, 370, 380, 390, 400, 410, 420, 430, 440, 450, 460, 470, 480, 490, 500, 510, 520, 530, 540, 550, 560, 570, 580, 590, 600
 
So the 50-day SMA is:
 
(100 + 110 + 120 + 130 + 140 + 150 + 160 + 170 + 180 + 190 + 200 + 210 + 220 + 230 + 240 + 250 + 260 + 270 + 280 + 290 + 300 + 310 + 320 + 330 + 340 + 350 + 360 + 370 + 380 + 390 + 400 + 410 + 420 + 430 + 440 + 450 + 460 + 470 + 480 + 490 + 500 + 510 + 520 + 530 + 540 + 550 + 560 + 570 + 580 + 590 + 600) / 50 = 385
 
Thus, the 50-day SMA of the stock price is 385.

B. Simple Moving Average calculation example

To make it easier to understand, let's look at an example of calculating the Simple Moving Average (SMA) on the EUR/USD currency pair with a period of 50 days.

  1. Determine the number of periods to be used: In this case, we will use a 50 day period.
  2. Determine the closing price for each period: We will use the closing price for each day for the last 50 days.
  3. Calculate the average closing price over a specified period: We will add up the closing prices for 50 days and divide the result by 50 to find the average closing price for this period.
  4. Repeat steps 2 and 3 for each new period until the last period: We will do the same calculation for each new period for the last 50 days and update the average result.
  5. Display the results of the Simple Moving Average calculation on the price chart: The results of the SMA calculation can be displayed as an average line on the price chart to assist in making trading decisions.

This example is just a simple illustration. In practice, SMA calculations can be more complex and include more periods and financial instruments. However, the basic principle of the calculation remains the same.

Use of Simple Moving Average

Determining the trend

 
Determining the trend is one of the most important things for traders in conducting technical analysis. Simple Moving Average can help traders in determining the trend of stock or currency prices.
 
To determine the trend, traders can compare the current price position with the Simple Moving Average value. If the current price is above the Simple Moving Average, then it can be said that the price trend is increasing (uptrend). Conversely, if the current price is below the Simple Moving Average, then it can be said that the price trend is decreasing (downtrend).
 
However, traders must also pay attention to the Simple Moving Average period used. A shorter period will be more sensitive to price changes and faster to follow trend changes, but also more susceptible to false signals. Conversely, a longer period will be more stable and less susceptible to false signals, but also slower to follow trend changes.

That is why it is important to determine the trend with the help of Simple Moving Average. Simple Moving Average can provide traders with useful information about the direction of the price trend and help them make better trading decisions.
 

Determining support and resistance levels

 
Determining support and resistance levels is one of the main benefits of using Simple Moving Average in technical analysis. A support level is a price level where buying activity is predicted to be stronger than selling activity, thus preventing a price decline. Conversely, a resistance level is a price level where selling activity is predicted to be stronger than buying activity, thus preventing a price increase.
 
Simple Moving Average can be used to determine support and resistance levels by observing the interaction between price and the moving average line. If the price moves above the average line, then the line can be interpreted as a support level. Conversely, if the price moves below the average line, then the line can be interpreted as a resistance level.

However, it should be noted that support and resistance levels are not definite and fixed lines, but rather levels that change depending on market dynamics. Therefore, technical analysis using Simple Moving Average must be carried out continuously and supported by good fundamental analysis to obtain accurate results.

Determining the time to enter and exit the market

 
Determining the time to enter and exit the market is very important for investors and traders in making transaction decisions. Simple Moving Average can help in this regard by showing the trend of stock prices or other financial instruments.
 
If the stock price is above the Simple Moving Average, then the trend tends to be bullish and this can be a good time to enter the market. Conversely, if the stock price is below the Simple Moving Average, then the trend tends to be bearish and this can be a good time to exit the market.
 
However, it should be noted that the Simple Moving Average is not a 100% accurate indicator in determining the time to enter and exit the market. There are several other factors such as market sentiment, economic news, and other fundamental factors that must also be considered in making trading decisions.
 
Therefore, it is better to conduct a thorough analysis and not just focus on the Simple Moving Average.
 

Conclusion

 
In this article, we have discussed the Simple Moving Average and how it can be used in technical analysis. We have discussed how to calculate the Simple Moving Average and given some examples of calculations. In addition, we have also discussed how the Simple Moving Average can be used to determine trends, determine support and resistance levels, and determine market entry and exit times.
 
In closing, the Simple Moving Average is indeed very important for traders and investors in analyzing price movements and making investment decisions. However, it should be remembered that the Simple Moving Average is only one indicator in technical analysis and needs to be used in conjunction with other indicators to obtain better results.

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reference:
 
Investopedia. (2021, November 8). Simple Moving Average (SMA). Retrieved February 7, 2023 fromi https://www.investopedia.com/terms/s/sma.asp
 
TradingView. (2023). Simple Moving Average. Retrieved February 7, 2023 from https://www.tradingview.com/education/indicators/moving-average/#simple-moving-average