Simple Moving Average Formula
You’ll really like the simple moving average formula, if you like math. 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 5 closing prices and divide that number by 5. But the great thing is that you have those moving average lines already set for you and you don’t have to go get your simple moving average calculator out.
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Simple Moving Average Formula Explained
- 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
- Good news is that this is done automatically with indicators
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 simple moving averages by choosing the different time frames you want to look at. Getting in on a moving avg crossover is an 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 is pointing up then you’ll know that the trend is bullish. If the SMA is pointing down then you’ll know that the trend is bearish.
By using the simple moving averages you can identify changes in trends when trading stocks. The longer period you use for your SMA the smoother your trends will be. The shorter the time frame you use the more volatility you’ll see.
The simple moving average formula that is a bullish breakout patterned that is formed by the SMAs. 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, which had been 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 that way for now. The golden cross is a popular bullish indicator for traders.
Another simple moving average formula is the death cross. The death cross is a bearish signal and it gets its name from the X it makes when the cross occurs. The death cross is typically seen as a short term move because it’s not a guarantee that price will fall long term.
Other things can cause the market to turn around even though there’s fear related to that trend. If you see the death cross occur there will be further losses typically short term.
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 support becomes resistance. The crosses are an easy simple moving average trading strategy.
Which Moving Average Is Best?
- Here are the best moving average lines:
- 9 exponential moving average & 20 ema, good for intraday trading
- Or 13 ema instead of 9 and 20
- 50 simple moving average, good for longer term trend trading
- 200 sma. Some like the 100 sma as well. Both are good for identifying trends
SMA’s are one of the foundations of technical analysis. They can be used to tell you a lot at a glance. The simple moving average formula can be used as support and resistance or as a trend line.
Knowing the trend of the stock is going to 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. SMA support and resistance is good for long term or swing trading. Just like following the crosses are. Use these indicators to tell you what direction the market is moving.
You don’t want to make blind trades. That’s why reading charts and using technical analysis is key.