The simple moving average is one of the types of moving average calculation. Moving average is essential to identify the current price trends as well as potential changes. Traders usually use it to know an uptrend or downtrend of security.
In calculating the moving average we add the recent closing prices, then divide it by the number of the time period. Yet, in a simple moving average, the calculation requires us to add several closing prices of a particular asset for a number of time periods.
Later, we also divide the result with the same number of periods. The short time version of it gives a quicker response to changes on that particular asset price than the long term one.
Here is the formula to calculate it.
SMA = A1 + A2 + … + An / n
An = the asset price during n period
N = the number of total period
Here is the example to help you understand SMA calculation better. Imagine that below is a security’s closing price in 15 days.
Week 1 (the first five days) = 20, 22, 24, 25, 23
Week 2 (the second five days) = 26, 28, 26, 29, 27
Week 3 (the last five days) = 28, 30, 27, 29, 28
The 10 days simple moving average requires you to find the average of the 10 days closing price.
What Can Simple Moving Average Tell Traders?
The main benefit of this technical analysis is it is customizable. It allows traders to calculate a different number of time periods. Traders only need to add the closing prices of a certain asset by a number of periods.
This simple moving average can help traders to smooth out the volatility. Thus, it gives a simpler display of a certain security’s price trend.
Once the SMA points up, then there is an increasing security price. On the other hand, if it points down, then the price is decreasing.
Traders can get a smoother moving average if they get a longer time frame. The short term moving average tends to be more volatile. Yet, it reads closer to the data source.