Smoothed Moving Average

A Smoothed Moving Average is the same as an Exponential Moving Average, but with a longer time. The Smoothed Moving Average gives current prices the same weight as historic prices. The calculation does not refer to a specific time period, but rather takes into consideration all available data series. This is accomplished by dividing today’s price by yesterday’s Smoothed Moving Average. Adding this outcome to yesterday’s Smoothed Moving Average yields the Moving Average for today.

What is the Smoothed Moving Average?

Smoothed moving averages are simply moving averages that give weight to price data points over time. Traders use it to forecast market trends based on a number of averages taken over a specific time period. They recalculate the averages to suit newer periods as more data becomes accessible. That is why it is referred to as a “rolling” average. Consider the SMMA to be a cross between its more well-known cousins, the simple moving average (SMA) and the exponential moving average (EMA). The SMA considers the price of a traded asset and divides it by the time under consideration, but it considers all periods equally. In contrast to the EMA, which emphasizes recent statistics. The smoothed moving average broadens the picture by ‘smoothing out’ short-term market volatility.

Setting up the Smoothed Moving Average
Setting up the Smoothed Moving Average

Smoothed Moving Average Strategy

When the short and intermediate term averages cross from below to above the longer-term average, it is a buy indication. When the short and intermediate term averages cross from above to below the longer-term average, a sell signal is given. The same signals can be used with two Moving Averages, but most market analysts recommend using longer term averages when trading only two Smoothed Moving Averages in a crossover strategy.

Another trading strategy is to employ the current price idea. You could buy if the current price is higher than the Smoothed Moving Averages. When the present price falls below either Moving Average, you could liquidate that position. You may sell a short position when the present price is less than the Smoothed Moving Average. When the present price rises above the Smoothed Moving Averages, you could liquidate that position.

Buy Signal

This could be your checklist for a buy trade:


  • When price is trading above the SMMA.

Once this event occurs:

  • You could open a buy position after you confirm your entry with bullish candlestick patterns.
  • You could set your stop loss just below the nearest swing low.
  • You could set your take profit at the nearest resistance zone, or you could exit trade when price falls below the SMMA.
  • For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
Smoothed Moving Average Buy Setup
Smoothed Moving Average Buy Setup

Sell Signal

This could be your checklist for a sell trade:

  • When price is trading below the SMMA.

Once this event occurs:

  • You could open a sell position after you confirm your entry with bearish candlestick patterns.
  • You could set your stop loss just above the nearest swing high.
  • You could set your take profit at the nearest support zone, or you could exit trade when price rises above the SMMA.
  • For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
Smoothed Moving Average Sell Setup
Smoothed Moving Average Sell Setup

Smoothed Moving Average Pros & Cons

Pros

  • The Smoothed Moving Average may be used to identify the trend direction of the asset.
  • This indicator could also serve as dynamic support and resistance levels.

Cons

  • The Smoothed Moving Average may sometimes have lagging issues when generating signals.
  • The indicator may not meet the trader’s expectations when used on smaller timeframes.

Conclusion

Whether you’re just getting started or have been trading for a while, the smoothed moving average is an instrument you could have in your trading arsenal. However, for all of its advantages, bear in mind that the SMMA only works well in certain market conditions. These are both positive and negative patterns. If the market is trending sideways, the SMMA may not provide much useful information. That is why it is critical to mix it up and not rely on a single instrument. Bollinger Bands, Price Channels, and the Stochastic Oscillator are a few of the technical indicators that could be used with the SMMA.

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