What is Smoothed Moving Average
A Smoothed Moving Average is a popular and widely used moving average indicator, similar to an Exponential Moving Average, only with a more extended period applied. The Smoothed Moving Average gives the recent prices an equal weighting to the historical ones. 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 Indicator
The Smoothed Moving Average is a Trend indicator and has been developed to smoothen the market noises and show the market trends more clearly.
How to calculate the Smoothed Moving Average Indicator
Here’s how you can calculate the SMA indicator
The formula is:
prev * (1.0 – smoothfactor) + newdata * smoothfactor
Why use the Smoothed Moving Average
Moving average is a simple, technical analysis tool 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. By employing the Smoothed Moving Average Indicator, one can get a crisp picture of the market behaviour and make informed trading decisions.
How to use the Smoothed Moving Average
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 smoothed moving average, it indicates that the current price is greater than the average of the defined period; hence the market is in an upward trend.
- When the shorter period moving average crosses over the longer time moving average, it indicates a new uptrend.
Defining a Bearish Scenario to generate a sell signal:
- When the price crosses down the smooth moving average, it indicates that the current price is lower than the average of the defined period; hence the market is in a downward trend.
- When the shorter period moving average crosses down the longer time moving average, it indicates a new downtrend.
Building Smoothed Moving Average 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 Smoothed Moving Average
SELL: When price crosses down the Smoothed Moving Average.
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
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