SMA is the easiest moving average to construct. It is simply the average price over the specified period. The average is called “moving” because it is plotted on the chart bar by bar, forming a line that moves along the chart as the average value changes.
Calculating the Simple Moving Average
| Period | Closing Price($) |
| 23-03-2022 | 3268.16 |
| 24-03-2022 | 3272.99 |
| 25-03-2022 | 3295.47 |
| 26-03-2022 | 3379.81 |
| 27-03-2022 | 3386.30 |
5-day SMA:
n= 5
Substitute the values into the SMA formula:
(3,268.16+3,272.99+3,295.47+3,379.81+3,386.30)/5 = $3,320.546
Day 5 price is greater than 5-day SMA (3,386.30>3,320.546): Buy signal
Trading Strategies using SMA
Constructing an SMA line from a collection of previous prices simplifies the volatility and minimizes the complexity of analysis. Importantly, it reflects the current trend in price movement. If the period used to calculate SMA is short, the output value will be similar to the observations; if the period is large, the SMA will be finer than the real data.
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