A simple moving average (SMA) is the average price of a security over a certain period. The average is created by taking (usually) the closing price of each bar and dividing that by the number of bars. For example, a SMA 100 will calculate the closing price of each bar over the last 100 bars, and then divide that to calculate the average. It can be also calculated using any available price of a bar, usually: open, high, low, close, (OHLC).
SMA 100 on CL 15m chart
SMA indicators are one of the oldest type of indicator and serve primarily to establish the direction of a trend. If price is above the SMA the market is considered to be bullish
SMA's are also used as a buy or sell signal. When price crosses above the indicator it is considered as a buy signal and when it crosses below it is considered a sell. More often two SMA's are used in conjunction, a "fast" one, averaging fewer bars, and a slow one, averaging more bars. When the fast one crosses above the slow indicator, it is considered as a buy signal, and when the the slow crosses above, it is considered as a sell. Typically coupled SMA values are used suchas 9/15, 15/21, 20/40, 50/200, depending on the market, volatility and trading style.
SMA's are considered lagging indicators, meaning that although signals are usually accurate, these are reveales many bars after the event, sometimes cutting considerably the profitability of the trade and others rendering it even obsolete. Many have attempted to produce smart moving averages that cut dome of that lag, also called no-lag or zero-lag SMA's.
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