What Is Smoothed Moving Average Envelope
A Smoothed Moving Average is an Exponential Moving Average, only with a longer period applied. The Smoothed Moving Average gives the recent prices an equal weighting to the historical ones. The reason for calculating the moving average of a stock is to help smooth out the price data by creating a constantly updated average price.
Smoothed Moving Average Envelope Indicator
The Smoothed Moving Average Envelope is a Trend indicator, and helps find overbought or oversold conditions, to smooth the price trend and as an indicator of price breakouts.
How To Calculate The Smoothed Moving Average Envelope Indicator
Formula :prev * (1.0 – smoothfactor) + newdata * smoothfactor
- Upper Band= smma * (100 + perc)/100
- Lower Band = smma * (100 – perc)/100
Why Use Smoothed Moving Average Envelope
The Smoothed Moving Average Envelope creates an envelope around a moving average, helping traders find overbought or oversold conditions, and smooth the price trend and as an indicator of price breakouts. This helps traders make informed decisions about entering and exiting the market.
How To Use Smoothed Moving Average Envelope
Moving averages are usually calculated to identify the trend direction of a stock or determine its support and resistance levels. It is a trend-following or lagging indicator because it is based on past prices.
The primary use of this study is its smoothing out function. In this way, the Moving Average removes short-term fluctuations and leaves to view the prevailing trend.
Defining a Bullish Scenario to generate a buy signal:
- When the price crosses above the upper band, it indicates that the current price is greater than the average of the defined period, hence the market is in an upward trend
Defining a Bearish Scenario to generate a sell signal:
- When the price crosses down the lower band, it indicates that the current price is lower than the average of the defined period, hence the market is in a downward trend.
Building Smoothed Moving Average Envelope Trading Strategy On Mudrex:
As discussed above, lets first write our entry/exit conditions so that we know what to do:
BUY: When price crosses up the upper band.
SELL: When price crosses down the lower band.
Overall Strategy: The overall strategy on mudrex looks like this
Testing: We can now run a quick back-test to see how our strategy performs.
A few quick references below: