Definition
The Smoothed Moving Average compares recent prices to historical ones and makes sure they are weighed and considered equally. The calculation of this indicator does not reference a specific or fixed period, rather uses all available data in the series for analysis. The Smoothed Moving Average differs from the Exponential Moving Average (EMA) because it’s generally used with a longer time period.
Calculations
The calculation for the Smoothed Moving Average, as mentioned above, does not refer to a fixed period, rather uses all data available in the series. The following steps are used to calculate the indicator.
- To start, the trader must subtract the previous day’s Smoothed Moving Average from the current day’s price.
- Next, add the result from Step 1 to the previous day’s Smoothed Moving Average.
- The results will yield the current day’s Moving Average.
Takeaways
Traders should not confuse the Smoothed Moving Average for the Simple Moving Average (SMA), which analyzes price data with equal weight in its calculation. The Simple Moving Average also removes the oldest price data as new price is added in its place. The two Moving Averages may sound similar, but they behave quite differently and confusing them could prove detrimental to a trade. It’s important for traders to remember that the Smoothed Moving Average is a function of weight in connection with price, or length of the average.
Additionally, the Smoothed Moving Average uses a longer period in order to determine the average and assigns weight to price data while the average is calculated. In this case, the oldest price data is never removed from the calculation of the Smoothed Moving Average. Although not removed, the oldest price data does have less impact on the Moving Average as a whole.
The notable use of this indicator is its smoothing out function and ability. The Smoothed Moving Average is able to remove short-term fluctuations and unimportant movement associated with the current trend. This is one of the many reasons why this indicator is popular amongst many traders.
What to look for
It is important to look out for a few key factors when using the Smoothed Moving Average. Let’s split this section into two points to analyze further: the period and aspect.
Period. The period represents the number of bars that appear in a chart. If a trader uses a daily chart with consistent data, the period then refers to days. For weekly charts, the period refers to weeks, and so on and so forth. The default setting for this indicator is a period of 9. Traders can alter settings if they choose to do so. In order to smooth the Moving Average, the period is usually lengthened. The following formula can then be used:
Period = 2*n-1
Aspect. The aspect refers to the specific Symbol field for which calculations will occur. The field has a default symbol setting, which again, can be altered by the trader to fit specific preferences or trade needs. The default setting is equivalent to “close.”
Limitations
For the most accurate and reliable results, the Smoothed Moving Average works best when paired with other indicators and technical analysis tools.
Summary
The Smoothed Moving Average compares recent prices to historical ones and ensures they are analyzed with equal weight. The indicator does not refer to a fixed period when calculating results, but rather it uses all data available and does not remove specific data points once they have passed a specific time threshold.
