4.1. what is sma
4.2. sma history
4.3. sma trading strategy
Trading on Cryptocurrency Bitcoin/Etherium with Simple Moving Average (SMA)
A Simple Moving Average (SMA) is an arithmetic moving average calculated by adding the closing price of the security for a number of time periods and then dividing the total by the number of time periods. In essence, it is a simple average. Many traders watch for short-term averages to cross above longer-term averages to signal the beginning of an uptrend. Short-term averages can act as levels of support when the price of a stock or security experiences a pullback. The same applies to cryptocurrencies as well.
A simple moving average can smooth out volatility, and make it easier to view the price trend of a security. If the simple moving average points upward, this means that the security price is increasing. If it is pointing down it means that the security price is decreasing. The longer the timeframe for the moving average, the smoother the simple moving average. A shorter-term moving average is more volatile, but its reading is closer to the source data.
The Simple Moving Average (SMA) is the most basic of the moving averages used for trading. The simple moving average formula is calculated by taking the average closing price of a stock over the last number of periods.
For instance, the last closing prices of a stock exchange “N” are the following:
28.93+28.48+28.44+28.91+28.48 = 143.24
To calculate the simple moving average formula, it is necessary to divide the total of the closing prices and divide it by the number of periods:
5-day SMA = 143.24/5 = 28.65
Absolute basic mathematics under an overglorified name suited for an economic reality.
Moving averages are an important analytical tool used to identify current price trends and the potential for a change in an established trend. The simplest form of using a simple moving averages in analysis is using them to quickly identify if a security is in an uptrend or downtrend. Another popular, more complex analytical tool, is comparing a pair of simple moving averages with each covering different timeframes. If a shorter-term simple moving average is above a longer-term average, an uptrend is expected and vice versa.
The first moving average technique for smoothing data points was used long before its application to trading. In 1909, G. U. Yule (Journal of the Royal Statistical Society, 72, 721-730) described the “instantaneous averages” R. H. Hooker had calculated in 1901 as “moving-averages.” Yule did not adopt the term in his textbook, but it entered circulation through W. I. King’s Elements of Statistical Method (1912).
As SMA is used in trading routinely, the following are a few popular strategies used by traders around the world with its application.
Going with the Primary Trend
Look for stocks that are breaking out or down strongly;
Apply the following SMAs 5,10,20,40,200 to see which setting is containing price the best;
Once you have identified the correct SMA, wait for the price to test the SMA successfully and look for price confirmation that the stock is resuming the direction of the primary trend;
Enter the trade on the next bar.
Fade the Primary Trend Using Two Simple Moving Averages
Locate stocks that are breaking out or down strongly;
Select two simple moving averages to apply to the chart (ex. 5 and 10);
Make sure the price has not been touching the 5 SMA or 10 SMA excessively in the last 10 bars;
Wait for the price to close above or below both moving averages in the counter direction of the primary trend on the same bar;
Enter the trade on the next bar.
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