SMA for beginners

The SMA (Simple Moving Average) is a very "simple" technical indicator which is used extensively by all traders. SMA is used to predict upward or downward trends. To make a SMA, you must define the number of days prior you want it to track. The larger this number, the less sensitive the SMA is to price movements and the more accurate it will be in predicting long-term price actions. This is because the SMA is an average calculated as the sum of a stock's closing prices for x number of days (which you define) divided by x. Whenever the current day closes, the SMA drops your closing price (x days ago) and adds the contemporary closing price. Therefore, the SMA is constantly changing. Now back to analyzing trends. The general rule is that when a stock is riding above its SMA, it is experiencing an uptrend. Take, for example, Apple on this 5-year chart:

You can see how Apple continues to do well when its stock stays above its 190-day SMA. Many times, a SMA can act a support to a stock. For example, around July 2016 Apple barely fell below the SMA yet rebounded back up. This is why you must wait for a confirmation to sell the stock if you believe it will take a down-trend. Selling too early will cost you gains as it did to those who sold it in July 2016. Normally, this means watching the stock continue to fall below the SMA for a couple more weeks and then sell. The same logic also applies for a downtrend. If a stock is tailing under its SMA, it is experiencing a downtrend. Now, for example, look at this chart of Sears:

Indicators are not the end all be all of investing. No indicator is foolproof and all one does is give you better judgement on a stock. Keeping that in mind, understand that you must use the SMA in conjunction with research of the stock to better predict its movement. A stock can not only be measured by numbers. Take, for example, Elon Musk's tweets. :).  To summarize, the SMA is a handy tool for predicting trends and for acting as support for a stock. 

 

Hope this cleared up any doubts and if you have any questions or concerns email us at This email address is being protected from spambots. You need JavaScript enabled to view it.. Have a Great Day!

 Maurice Richard Womens Jersey