Like most indicators, the moving averages use past price data to determine the direction of the market. Currently, there are various kinds of MA, including the simple moving average (SMA).
Traders calculate the SMA acronym finance by determining the average of values or prices over a certain period. It helps traders determine if the small futures and stock’s trend will continue or is about to reverse.
And when done correctly, you can benefit from a perfectly timed trend reversal. But first, you must understand SMA meaning stock market, and how it can help with technical analysis.
Therefore, before entering a position, you’ll need other indicators on your SMA chart to confirm the reversal. So in our SMA explained article, we’ll answer the question, “What does SMA mean in stocks?” We’ll also show you how to calculate SMA for stock analysis.
Understanding SMA: Definition and Significance in Stocks
Before we talk about SMA stock meaning, we need to understand that SMA refers to the average price over a given period. It’s referred to as “moving” because traders plot it on their chart bar-by-bar, creating a unique line that moves on the chart while the average price changes.
It is calculated by adding all the recent prices of the stock before dividing them by the number of periods.
For example, you can add the closing values of a stock for a certain period before dividing the results by the number of periods. Fortunately, short-term SMA responds quickly to price changes, while long-term ones react slowly.
So if you understand SMA meaning stock market, you can plot a chart with a long and short-term SMA.
Remember, the SMA offers a unique line less prone to upwards/downward movements in response to the price moving back and forth. Unfortunately, it responds slower to rapid changes in price that occur when the market is reversing. This makes it the best option for traders analyzing long-term frames.
When trading stocks, you can use the SMA to establish the market’s trend based on its previous prices. And since this tool uses previous closing prices, it is a lag indicator.
This means that it’s not the only best option for predicting a stock’s future price. But it can help us determine when the price will reverse. And when you plot the two SMA lines correctly, you’ll never miss a trend reversal.
How to Calculate SMA for Stock Analysis
SMA calculations vary with the period selected; in fact, the most popular one is the 50-day SMA. To help you understand 50 SMA meaning, we’ll elaborate more on SMA calculation.
When plotting a 50-day SMA on a 60 minutes chart, you’ll have to add the market’s closing prices for the last 50 days. And then, you can divide the final by 50. Finally, you can string these averages to get your moving average.
The SMA calculation for the coming day drops its earliest price and then includes the price of day 11 to leave it with 10 data points. You can do the same for 200, 50, and 9 consecutive periods. This means that the SMA calculation is customizable since you can calculate it for various periods.
Using SMA as a Technical Indicator in Trading
What is SMA stocks trading strategy? The SMA provides a broad view of the stock market than the share’s price alone. Luckily, you can use this tool in a number of ways when improving your strategy and exiting or entering a position. So you can use it in the following ways:
Identifying Price Trends
if you know what is the SMA indicator, then you know its main functions. The most straightforward usage of this indicator is identifying whether the asset trends are lower, higher, or ranging.
So you can use this tool to compare long, medium, and short-term over a certain period. It can help you determine whether the market has the potential for changing directions and trends.
The 20 SMA trading strategy can be a great tool for identifying the market’s direction. When included in a chart, you’ll be looking at line and chart interactions. If the chart is higher and its price is on top of it, then the stock is trending upwards and vice versa.
Trade SMA Intersections
You can use the intersections as a sell and buy signals. So when the stock’s price crosses on top of the line, you can go long and vice versa. After all, the SMA lines can serve as resistance and support levels.
Trade SMA Crossovers
To get a stronger understanding of the market’s trend, you’ll have to compare the MA of various periods. For instance, when the 50-day SMA crosses on top of the 200-day SMA, it’s a bullish signal and vice versa.
SMA vs. EMA: Which Moving Average to Use?
The SMA and EMA are exceptional tools for measuring trends. On top of that, these moving averages are interrupted in the same manner. After all, traders use them to smooth out price changes. But there are various differences between these measurements.
The main difference between the SMA and EMA is the sensitivity they show to the change in data. The SMA determines the price data’s average, while EMA focuses more on recent prices. This means that the current price change will have more effect than the older price data.
The fact that the EMA focuses on recent results makes the EMA’s results timely. This is the main reason most average traders prefer the EMA. The EMA is an excellent option for swing and intraday trading as it’s responsive to recent data.
Explaining the Role of SMA in Stock Market Trends
Generally, the simple moving average is an excellent analytical tool that traders use to identify the current trend. Basically, they can help you determine the current direction and also when it’s about to change.
A simple method is combining a short-term and a long-term SMA to determine the market’s trend. So when the short-term SMA crosses over the long-term line, then it’s an upward-trending market. And after selecting the trend, you can use the points of interception as position entry or exit positions.