By Arjun Chandrasekar.
Overview
The Simple Moving Average (SMA) is one of many popular technical indicators that investors use to determine bullish or bearish trends. What the SMA tells us is whether the price will stay consistent or reverse. The basis of the SMA is determined by the average of the range of prices in a given period of time. Today we’ll cover a more in-depth explanation of the SMA and then compare it to the Exponential Moving Average (EMA).
SMA
To find the SMA of a stock price, you need to first analyze the recent trends of the stock price. Any good technical analysis tool, such as POWER E*Trade or TradeStation, will show you the graphed trend. Then you want to find a time period to average in. Normally, short-term investors use the 10-day or 20-day periods, while long-term investors use the 50-day or 200-day periods. After taking the average of the stock prices, you then want to divide it by the number of time periods.
Formula
SMA = (A1 + A2, + … + An)/(n)
A = stock price, An = stock price at period ‘n’, n = total number of periods
Examples
Let’s say an investor wants to know the SMA of a startup for a 10-day period. The stock prices for the 10 days in order are: $10, $12, $9, $10, $15, $13, $18, $18, $20, $24. Using the formula above, the calculation would go as follows:
(10 + 12 + 9 + 10 + 15 + 13 + 18 + 18 + 20 + 24)/(10) = 14.90
If we want to compare it to a longer period of time, say the 20-day, we can just change the ‘n’ to 20.
(10 + 12 + 9 + 10 + 15 + 13 + 18 + 18 + 20 + 24)/(20) = 7.45
We can then use these results to determine if a stock price will continue or reverse its current trend.
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