InvestorQ : Can you explain in detail how the SMA works as a technical indicator?
Debbie Mascarenhas made post

Can you explain in detail how the SMA works as a technical indicator?

Answer
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Crowny Pinto answered.
1 year ago


SMAs are often used to determine trend direction and they work pretty well for stable stocks with stable volume growth. If the SMA is moving up, the trend is up. If the SMA is moving down, the trend is down. A 200-bar SMA is common proxy for the long term trend. 50-bar SMAs are typically used to gauge the intermediate trend. Shorter period SMAs can be used to determine shorter term trends and vice versa. One of the big jobs of SMA is to smooth the raw price curve. SMAs are commonly used to smooth price data and technical indicators. The longer the period of the SMA the smoother is the result that you get. Of course, in this case a greater lag is introduced between the average and the actual price and hence longer period SMAs can only work in case of long term trends. Shorter period SMAs work better in case of shorter term trends.

The most important trigger is when the lower level SMA cuts past he higher level SMA. Price crossing SMA is often used to trigger trading signals. When prices cross above the SMA, you might want to go long or cover short; when they cross below the SMA, you might want to go short or exit long. SMA Crossing SMA is another common trading signal. When a short period SMA crosses above a long period SMA, you may want to go long. Conversely, you may want to go short when the short-term SMA crosses back below the long-term SMA.

The calculation of SMA is very simple and straight forward. SMA simply entails calculating the mean or average of the stock price values over the specified period.