The simple moving average (SMA) is a widely used technical used by traders and investors. It can be calculated for different prices, such as the open, close, high, and low. It is a backward-looking indicator and relies on past price data for a certain period.
The SMA indicator is used to indicate buy and sell signals to traders and investors. It helps to identify support and resistance prices of stocks to signal where the asset should be traded. Traders and investors also use SMA crossovers to indicate bullish and bearish price action. However, to generate the indicator, it must be first calculated by using past price data and then plotted on a chart.
The SMA is easy to calculate and is the average stock price over a certain period based on a set of parameters. The moving average is calculated by adding a stock's prices over a certain period and dividing the sum by the total number of periods.
For example, a trader wants to calculate the SMA for stock ABC by looking at the high of day over five periods. For the past five days, the highs of the day were $25.40, $25.90. $26.50, $26.30 and $27.90. The SMA, based on the highs, is $26.40 (($25.40+$25.90+$26.50+$26.30+$27.90)/5). The past five closing prices of stock ABC are $25.25, $25.50, $25.00, $24.90 and $26.80. Therefore, the SMA is $25.49. This calculation can be extended to more periods, such as for 20, 50, 100 and 200 periods.