What is smoothed moving average?
To know what a smoothed moving average is, you must know what a moving average is.
A moving average is a technical indicator that calculates the price average over a particular period of time.
The Smoothed Moving Average or the SMMA, is just the same. The difference being that, the SMMA has a little tweak as to how it treats the price data.
The SMMA has a different calculation and it smoothens out the data by assigning different weightage to it. This helps reduce the lag that the other moving averages face.
By reducing the lag, the SMMA takes care of the short term price fluctuations and it allows us to view the trend clearer.
How is it calculated?
SMMAi = (Sum - SMMAi-1) / N
SMMAi: The value of the period being calculated.
Sum: The sum of the source prices of all the periods, over which the indicator is calculated. (Sum = Pricei + Pricei-1 + ... + Pricei-N+1)
SMMAi-1: The value of the period immediately preceding the period being calculated.
Price: The source (Close or other) price of any period participating in the calculation.
N: The number of periods, over which the indicator is calculated.
If you see, the SMMA too is just calculating a price average, and along with this, it’s assigning some weightage to the price data.
In the SMMA, a longer time period is used to calculate the average, and it’s because of this too, that it’s able to show the trend in a smooth manner.
What makes it different from the other moving averages?
Every moving average is a trend tool and it is made to understand the trends. The SMMA, being a type of moving average, does just the same.
But, there’s something that it does better and it’s because of the way that it’s calculated that makes it a bit different from the other moving averages.
If you see the SMMA calculation, you’ll see that it assigns some weightage to the price data, this does not happen in the Simple Moving Averages.
So if you’d compare the SMMA with the SMA, then you’ll see that the SMMA is quite smoother than the SMA.
On the other hand, the EMA too assigns weight to price data, but, it does this only to the most recent one.
The SMMA assigns a weightage to all price data, with the most recent one getting the highest and it decreases as the data gets older.
Now comes the biggest difference between the SMMA and all the other moving averages.
If you know how the moving averages are calculated, then you’ll see that it discards the oldest price data as it moves ahead.
But, this is not the case with the SMMAs as it doesn’t discard any price data, instead, it keeps them in the calculations but it just decreases its weightage and it fades away smoothly.
How to trade the SMMA?
There isn’t any difference in the way the SMMAs are to be traded or to be used as compared to how all the other moving averages are used.
Just like any other, the SMMAs too, are to be used to understand what the price is doing, establish trends, and to know the market phase.
The most basic use of the SMMA would be to know the trend. So, if the price is above the SMMA and the SMMA is sloping up, then the trend is bullish.
While, if the price is below the SMMA and the SMMA is sloping down, the trend is bearish.
Using this same method, you can trade price pullbacks. When the price is trending, it will at times exhaust and retrace till the SMMA, once you get a confirmation of a price continuation, enter the trade.
This is how many traders use the moving averages as dynamic support and resistance.
The method of moving average crossovers can be applied by using the SMMAs too.
In this, you’ll have to use two SMMAs, one of a shorter length and the other of a longer length.
Once the shorter length SMMA crosses the longer length SMMA to the downside, it’s a bearish indication.
And if the shorter length SMMA crosses the longer length SMMA to the upside, it’s a bullish indication.
So, even though the SMMA is a bit different from the other moving averages, and, it might be one of the best moving averages, you don’t need to worry about how to use them in trading.
Use the same methods that you’d use with other moving averages, and you’re good to go.
Which moving average do you use?
Do let me know which moving average you use and also, if this blog post was of any help in convincing you to try out the SMMAs.
Share this blog post with others and let them also get aware of this amazing type of moving average.
Feel free to reach out for anything through the comments section and I’ll get back to it all at the earliest.