What are the main advantages and disadvantages of using a Simple Moving Average (SMA)?
The Moving Average is a typical indicator employed by traders to determine trends in the marketplace. If you want a moving average that will react to the price action rather quickly, then a quick period SMA is the best method to go. Instead of merely studying the present price of the current market, the moving averages give us a broader view, and we are now able to gauge the overall direction of its upcoming price. It is possible to observe that moving averages are a multi-faceted tool that could be utilized in a range of distinct ways. To locate a simple moving average isn’t particularly straightforward.
Traders often use moving averages as it is sometimes a great indication of current market momentum. Because so many traders are watching the exact same line and planning similar tactics to utilize it, it will become a type of collective meeting place. They don’t really understand that simple word.
In the event the price falls a massive distance, it could be sufficient to skew the averages temporarily. The closing price method is easily the most popular one and widely employed. You have the typical closing price over the past five hours!
The simple moving average is just the average of all of the data points in the series divided by the amount of point.
Advantages of SMA
The longer you remain in a marketplace, the more potential money you can possibly make. The market is similar to a rubber-band. If you would like to long, you’d wish to long the strongest market. The stock exchange is an unpredictable investment ground that there is truly no textbook strategy.
The advantage of working with a weighted average is the fact that it allows the final average number to reflect the relative relevance of each number which is being averaged
The important advantage of weighted averages for stocks and accounting is it smoothes out fluctuations in the marketplace.
Disadvantages of SMA
The Simple Moving Average is slower to respond to rapid price changes that occasional occurs in reversal points
In case the price is above the MA, consider as support where you could enter a lengthy position. If it breaks the 100 SMA downwards, we need to short the stock placing a stop below the bottom prior to the breakout. If it is below the 200-SMA, you should be looking for short trades. For example, if it is above the 200-SMA, you should be looking for long trades.
The trend is not extendable for future values because the trend is neither a straight line nor a standard curve.