Simple Moving Averages

The midterm break is here!!:D Not that it is a break anyway, there are still the dreading midterms that are coming right up...but all is good and wonderful for now. Looking forward to the gatherings that i shall have!!

Simple Moving Averages (SMA)

One of the most important tool that technical analysts look out for is the moving averages. In fact, it is so important that it almost always guarantee profits if used wisely. Moving averages serve to smoothen the data set and sieve out all the white noises. There are three moving averages and the focus will be on SMA for now.

1. Simple Moving Average
2. Exponential Moving Average
3. Weighted Moving Average

A simple moving average is the average price of a security over a number of periods. Closed prices are used to chart the lines. For example, a 10-day moving average is calculated by summing the closing prices of the last 10 days divided by 10. The common periods used are 200-day SMA, 50-day SMA and 25-day SMA. SMAs always lag behind price movements and the longer the moving average, the more it lags behind. Hence, SMAs are good at predicting trends of the stocks. SMAs are effective when there is a trend forming with little fluctuations.

Generally, a buy signal is generated when the stock price goes above the MA and a sell signal is generated when the stock price drops below the MA. Also, when a shorter period MA crosses over a longer period MA, it is a buy signal. Similarly, when a longer period MA crosses under a shorter period MA, a sell signal is established. Below is an example that i drew using Chartnexus. I chose the STI index and plot its 25, 50 and 200- day MA. Not really good at it..still learning. Quite happy because i can now run chartnexus with my Mac using VMware Fusion, that means that i can run Mac and chart instead of running bootcamp all the time. =)