Simple Moving Averages – A Big Trading Advantage

A simple moving average is an arithmetic moving average computed Simple Moving Averages by multiplying current prices by the number of time periods in the computation average. For example, one may sum a security’s closing price for a number of time periods and divide the total by the same number of time periods. Changes in the price of the underlying security are promptly reflected in short-term averages. The weighted moving average and the exponential moving average are two further forms of moving averages. The average of a given range of prices, generally closing prices, divided by the number of periods in that range is calculated via a simple moving average.

In simple words, a simple moving average is a chart indicator that may be used to spot trends and important price points in a futures contract, exchange traded, currency pair, commodity as well as stock. The indicator is calculated as a price average over a specified time period, such as 200 days. Critics contend that using a simple average lends too much weight to older data that is regarded less valuable. As a result, many traders would rather employ an exponential moving average.

Simple Moving Averages

The exponential moving average has the benefit of responding to price changes faster than the SMA since it is weighted to the most recent price movements smma. This is especially useful for traders looking to trade swing lows and highs since the exponential moving average identifies trend shift faster than the SMA. The SMA’s key benefit is that it provides a leveled line that reacts lesser in any certain way to any reaction to minor, transient price movements. The SMA’s flaw is that it takes longer to react to fast price fluctuations, which occur often near market reversal moments. Traders and analysts that work with larger time frames including but not limited to weekly charts, frequently choose the SMA.

Because it may be calculated for different amounts of time periods, a simple moving average is adaptable. This is accomplished by aggregating the security’s closing price for a number of time periods and then dividing the sum by the number of time periods, yielding the security’s average price during the time period. A simple moving average reduces volatility and makes it simpler to see a security’s price trend. The smoother the simple moving average, the longer the time frame for the moving average. A shorter-term moving average is more volatile than a longer-term moving average, but its reading is closer to the original data.

The Final Word

The advantage of the simple moving average is that they are way more smooth and less prone to fake signals than the exponential moving average. The disadvantage is that some of the data used to calculate the moving average may be outdated. Nonetheless, the EMA and SMA serve the same purpose: to detect trends and indicate regions of support and resistance. Because neither average is necessarily superior, the trader’s trading style usually determines which one to utilise.

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