As we know, a simple moving average (SMA) is a trading indicator and calculation that takes the arithmetic mean of a given set of prices over a specific number of days in the past.
A smoothed moving average is a moving average that assigning a weight to the price data as the average is calculated, deals with a longer period, and represents the combination of a simple moving average and exponential moving average. A smoothed moving average does not refer to a fixed period but rather collects and enrolls all available data from the past. To calculate today’s moving average, traders have to subtract yesterday’s smoothed moving average from today’s price. After that, traders have to add the result to yesterday’s price.
Watch Smoothed moving average video:
Smoothed Moving Average Period. This characteristic deals with the number of bars in the chart. In daily data, the period will stand for days, whereas for months, it will denote months, and so on. The app sets a default of 9, but the period is lengthened for the user’s convenience, which allows you to view the data easier and create a general vision of the current price trend.
Smoothed Moving Average Aspect. Deals with the symbol field where the data series are calculated. As you enter the app to look for a symbol in the chart, it will be set to “default,” which is identical to the “Close” symbol.
Smoothed moving average series (SMMA) calculation
The combination of a simple moving average and the exponential moving average is called a smoothed moving average. The value of SMMA is approximately equal to the EMA value, with just the period as double of that of EMA. This smoothing technique allows analysts to reduce volatility in a series of data. Since this technique takes input from past time periods, that’s why it captures the economic scenario better than non smoothed graphs.
Some analysts take out all EMA, SMA, and SMMA and then analyze the market trends. Anyway, it is always a personal choice as to how many parameters to consider.
The SMMA formula
The Smoothed Moving Average formula represents the calculation of average as follows:
SMMA(i) = (SUM(i-1) – SMMA(i-1) INPUT(i))/N
where the first period is a simple moving average.
The formula to calculate the SMMA is:
SMMA = (SMMA# – SMMA* + CLOSE)/N
SMMA# – Previous bar’s smoothed sum
SMMA* – Previous bar’s smoothed moving average
CLOSE – Present closing price
N – Period of smoothing
How does it work?
A smoothed moving average differs from a simple moving average in several aspects. The most important difference refers to the period taken into account while doing the calculation of the average. A simple study uses only the most recent data for generating the average. Simultaneously, a smoothed study also considers data from the distant past, say a month or two months ago, which plays a role in determining a more accurate and relevant average. Still, older data and new data are not assigned the same weight due to their relevance in establishing the current price. Price data collected one month ago, for example, will be given lower significance in calculating the smoothed moving average due to its small impact on the current price trends. Nonetheless, it is not removed from the computation process, as it fosters a long-term vision of the trading trends.
The main advantage of a smoothed moving average is that it removes short-term fluctuations and allows us to view the price trends much easier.
Smoothed moving averages are widely used in trending markets. You are alerted about a new buy signal when the line denotes a short term average crosses above the line that stands for a longer-term average. Simultaneously, a sell signal occurs when the short-term average crosses below the long term average. Marketing technicians suggest using longer-term averages while trading with two smoothed moving average that uses the same signal.
Another approach in trading is to know how to manage the current price. If you have a current price that passes over the smoothed average line, you buy. When the current price gets below the moving average, you remove the position. As regards a short position, you sell when the price crosses below the moving average. When it rises above, you remove the position.
If you want to become a successful trader, you should learn to tell simply from smoothed moving averages. While simple average works with a short-term period and processes only new data, smoothed average promotes a longer-term study, assigning weight to old data for a clearer view on price trends.
Measuring market trends and then investing in the right stock is the best way to make money; it is accepted by every investor out there. It is the sense of analyzing the trend which makes the difference.
There was a time, not very back when people used to buy and sell stocks according to their intuitions. But now, technical analysis has taken the market. Several tools consider the historical stock price data and give predictions based on that. This analysis has definitely increased the probability of your decision to be right.
Any tool cannot be perfect in analyzing the trends because the market never moves in a straight line; there are variations in the market every moment which one has to analyze, making it a tedious task. The analysts take the help of many parameters, out of which some are listed below –
This analysis technique is the most trusted and widely accepted because of its versatile nature. The most widely used form of moving average by the analysts is the 200-Day moving average. Here 200 days – moving average is plotted on a price chart, and whether the price of the stock is above the moving average line or below it, it is indicated that the stock should be sold or bought. Some analysts also consider 50 or a 10 day moving average.
There are two main types of moving averages –
1. Simple Moving Average
It is the most common method of taking out the average; it is taken out by adding prices and dividing it by the price data.
Let us take an example –
If the following are 7 stock prices 10, 20, 30, 40, 50, 60, 70 and we want to take out the SMA then it would be
(10 + 20 + 30 + 40 + 50 + 60 + 70) / 7 = 40
So the simple moving average of this set of data is 40.
This data will prove to help get a clue about what might happen next in the market. It might seem to be a straightforward technique, but still, it has to face criticism from experts; this criticism is because of the “drop-off effect.”
Here what happens is that the latest prices make a minimal impact while on the other hand, the earliest prices sometimes make a huge impact. One needs to keep this in mind. The smoothed moving average can also be manipulated by discarding the earlier data. Any large change in the smoothed moving average can give wrong indications, which can incur losses to the investor.
Also, some older data might be significant, which the simple moving average is not considering.
To eradicate these shortcomings of the simple moving average, analysts came up with the exponential moving average (EMA).
2. Exponential moving average (EMA)
It is a versatile averaging technique used by analysts. It values current prices more as compared to past prices. It makes exponential moving average sensitive to recent price fluctuations.
The calculation of EMA also includes the previous recent EMA values.
The formula for calculating EMA is –
EMA = EMA# + SF*[P – EMA#] where
EMA# is the previous latest EMA value
P denotes the price in that period.
SF stands for a smoothing factor.
Because of its unique calculation, EMA follows prices more closely than an SMA.
Smoothed moving average vs. Simple moving average vs. Exponential moving average
EMA value is susceptible to market trends; it can help the investor to take respective actions. For any investor who wishes to quickly grasp the market trends, it will be much better to use EMA than an SMA value. But one disadvantage is that if there is a sudden spike or abnormal event in the market, then EMA being very sensitive and prompt to market conditions will signal the investor to quit the stock, making a loss.
On the other hand, if the investor has a long-term vision and is ready to wait and observe the market, then SMA would be the best choice because of its smoothness. If a trend is set, then it usually lasts for a long time. That’s why choosing SMA, in this case, can be beneficial, but since SMA shows a huge delay, it will ignore good entry points, and the investor might lose the opportunity to make profits.
Smoothed moving average as a combination of SMA and EMA using smoothing technique allows the analysts to reduce volatility in a series of data. Because of that, the smoothed moving average is SLOWER than the SMA.
That’s why it is said that different trading patterns require different methods of analysis. One can never bank on anyone’s analytical technique; one should use simultaneous techniques to get a broader perspective since trading is all about probability. That’s why you cannot be even sure that after so much analysis, you will achieve what you desired.
Trading is a game of chance and risks; one will have to devise their own methods, which suits them the most. Experimenting without fearing anything will be very beneficial in stock trading. The more you trade fearlessly, the more sensitive you will become towards market trends. Even after so many analysis techniques, one should always listen to its gut feelings. After a certain period of time in trading, people automatically develop the attitude of taking risks and start playing big, which pays them big and costs them big. Using a smoothed moving average, a trader can get a bigger picture of the trend.