If you like math, you’ll like the simple moving average formula. You take the total of the closing prices and add those together. Then you divide by the number of days. So, if you picked the 50 or the 200 SMA, you’d add up all those closing prices and divide by 50 or 200. If you pick the 5 SMA, you’d add up five closing prices and divide that by 5. But the great thing is that you already have those moving average lines set for you, and you don’t have to get your simple moving average calculator out.
Here’s how you calculate the simple moving average formula:
- Choose the time frame
- Example: 50 sma
- Add up all of the closing prices during 50 days, then divide by 50
- The good news is that this is done automatically with indicator
When a short-term SMA crosses above a long-term SMA, it signals the beginning of a long-term trend. You can also use the SMAs as support and resistance levels. You can customize your moving averages by choosing the different time frames you want to look at. Getting in on a moving avg crossover is usually a bit more forgiving of a strategy, but that doesn’t mean you should fat-finger the trade.
The SMA is used to smooth out volatility. This makes it easier to see a price trend. If the SMA points up, you’ll know the trend is bullish. If the SMA points down, you’ll know the trend is bearish.
Using simple moving averages, you can identify trends when trading stocks. The longer period you use for your SMA, the smoother your trends will be. The shorter your time frame, the more volatility you’ll see.
The simple moving average formula is a bullish breakout pattern that the SMAs form. You get this cross when a short-term SMA crosses above a long-term SMA.
Traders like this cross because the longer-term SMAs crossing holds more weight, and the breakout is more long-term.
The most popular SMAs for the golden cross are the 50 and 200 SMAs. When the 50 crosses the 200, the 200 SMA, a strong resistance level, becomes support, and the uptrend into a bullish market is strong.
This is a chart for AAPL, and you can see in the shaded area that the purple line is the 50 SMA, and the blue line is the 200 SMA. The 50 crossed the 200. That is the golden cross. The stock moved into a bullish trend and has continued for now. The golden cross is a popular bullish indicator for traders.
Here is the chart for AAPL that shows you the death cross. The 200 SMA is blue, and the 50 SMA is purple. They cross, and you can see the X. The 200 SMA, which used to be supported, becomes resistant. The crosses are an easy, simple moving average trading strategy.
Which Moving Average Is Best?
SMA’s are one of the foundations of technical analysis. They can be used to tell you a lot at a glance. For example, the simple moving average formula can be used as support and resistance or as a trend line.
Knowing the stock trend will help you know what to buy, especially when trading options. Knowing whether or not to buy calls (bullish) or puts (bearish) is the difference between profit and loss.
Using the SMAs to find support and resistance is a great tool. Like following the crosses, SMA support and resistance are good for long-term or swing trading. Use these indicators to tell you what direction the market is moving.
You do not want to make blind trades. That’s why reading charts and using technical analysis is key.