Moving Average (Simple)
A Simple Moving Average (SMA) finds the average price of a security over a set number of periods. The calculation of the SMA is like the name suggests, simple. The mean of the underlying financial instrument is calculated over a period of time. Prices during this period area added and then divided by the total number of time periods. Every bar is thus given the same weighting.
The formula for the SMA is:
The SMA is an upper technical study. ProSticks allows up to three SMAs to be plotted at one time. Default parameters of 10, 20, and 50 bars are used to calculate the SMA. Other than the Close, the High, Low, and ProSticks Modal Point are also available to use for the calculation of this Moving Average. 200 bars is commonly used by many for tracking trends.
Most traders use the SMA as a crossover trading system. Two SMAs are plotted and the shorter period SMA is used as the signal line. For example, if the shorter period SMA crosses over the longer period SMA from below to above, then it is considered bullish and a buy opportunity. Conversely, if the shorter period SMA crosses over the longer period from above to below, then it is considered bearish and a sell opportunity.
The SMA is also used as a support and resistance level. If the price moves away from the SMA and retraces back, more often than not, the SMA will prove to be a strong support or resistance, depending on the prevailing trend. Note that only certain common SMAs can be used for this purpose. 50 and 200 bars are commonly used to measure support and resistance.