How to use Simple Moving Average (SMA)

The simple moving average (SMA) is widely used as a guide for the current trend of a stock. The calculation is summarised as follows:

SMA = ( A1 + A2 + A3 + …. + An ) / n

where:

A = average in the period, n

n = number of time periods.

Let’s skip the theory and discuss the application because I believe it is more important. We use various time periods of moving average in a stock chart. The common time periods are 5-days, 10-days, 21-days and 65-days. If you are an observant you will notice my chart analyses have been using these moving averages.

I don’t use an exponential moving average, I prefer to keep thing simple and SMA is good enough for my technical analysis. Some chartists prefer to have many moving averages in their chart, I think it depends on the individual. As long as you are able to read the chart quickly and clearly.

In order for the stock to move into my watchlist, the golden cross criteria must be attained. I use 10-day moving average and 65-day moving average as my guide. The golden cross means these moving averages cross each other and the 10-day moving average is moving above 65-day moving. It also means the stock has begun a new trend to move up.

Example:

On the other hand, the moving averages also cross each other and form a death cross. From the name itself, death cross means a confirmation of downtrend or an exit point. Contradict to golden cross, the 10-day moving average is moving below the 65-day moving average after the death cross. By using the death cross, you can avoid many unnecessary trades, especially when the news on a particular stock remains positive in the market. I always use this as a guide to avoid being influenced by the news.

Example:

I hope the explanation on the post will provide you with an idea of how chartists exploit moving averages in their trading. There are many indicators in a chart platform, generally, golden cross and death cross should contribute you in filtering out some stocks or avoid losses in the market. If you like the post please share this to your friend, help them to learn and become better. Traders who share always become better in trading; the theory of learning by teaching is extremely effective. Trade safely.

Author: Gerald Koh