Simple Moving Average (SMA)
Candlefocus EditorThe Simple Moving Average can be used as either a trend-following indicator or an oscillator. As a trend-following indicator, the Simple Moving Average helps traders identify the overall trend of a security, by smoothing out the price movements. By studying the SMA, traders can spot when a price trend may be coming to an end and begin to look for possible changes of direction.
As an oscillator, the SMA may provide traders with a more timely signal, as it oscillates around the current market price. In this capacity, it can be used to spot short-term overbought or oversold conditions, as well as helping to identify any potential reversals in the price of a security.
A Simple Moving Average can be modified and enhanced in a number of ways to increase the level of accuracy and effectiveness. One of these is to use an Exponential Moving Average (EMA). Instead of taking the average of all the previous data points, an EMA places more weighting on the most recent prices, allowing it to respond quicker to changes in the market.
Traders can also use multiple SMAs, or multiple EMAs at the same time, in order to spot potential support and resistance levels, as well as enhance their ability to identify potential trading opportunities. By combining the use of multiple moving averages, as well as other technical indicators, traders can create customized trading strategies.
The Simple Moving Average is a widely used, versatile and effective technical indicator that can be used to better understand, analyze and interpret the markets. With multiple configurations and the ability to be enhanced with EMAs, traders can create a custom indicator that best fits their trading style and individual goals.