Simple Moving Average (SMA)

Simple Moving Average (SMA) means a line constituted by the average stock price of the past. For example, a 10 days SMA is a line constituted by the stock price averaged of past 10 days.

Simple Moving Average (SMA) has several simple uses and it is very common among technical analyst.

1 Golden Cross/Dead Cross

When a shorter term SMA cross a longer term SMA from below to above(5days SMA cross 10days SMA),

Golden cross is formed. This is the common definition. To be more specific, for a golden cross to be formed, both short term and long term SMA should be slope upwards.

For deadly Cross, it is completely opposite. When a shorter term SMA cross a longer term SMA from above to below(5days SMA cross 10days SMA), dead cross is formed. Specifically,  for a dead cross to be formed, both short term and long term SMA should be slope downwards.

One of the most simple technical strategies is buy in when a golden cross is formed and sell out when a dead cross is formed.

2 Slope of SMA

If we monitor directly everyday actual price movement, sometimes we can hardly see the trend because there are so much noise and volatility. Therefore, we can choose to monitor the slope of the SMA because SMA represent the average value of the past stock price and is more smooth compared to actual price. The longer the SMA is, the more powerful is it to determine a trend. Especially when an original upward slope SMA starts to slope downward, it may indicate a change of upward trend to downward trend. 

3 Support and Resistance Line

When SMA is below the actual stock price, it serves as a supportive line. When the price touches that particular SMA from the top, it will face strong buying power  and hard to break through it. When SMA is above the actual stock price, it serves as a resistance line. When the price touch the SMA from below, it will face strong selling power and hard to break through it.

The theory behind this phenomenon is because of the main power. Main power usually requires a few days/weeks to buy in the amount of stock they required (main power buy a lot of stock). If a main power use 10 days to buy in the stock, 10 days SMA becomes his average buy in prices. Therefore, when actual price drop and touch SMA line, main power will stop the dropping of price by buying more. This is because actual price above SMA (average buy in price for main power) means a profit and actual price drops below SMA means a loss for main power.

Continue to Step 7: "Bollinger Band"

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