Simple moving averages (SMA) are viewed as a low-risk area to place transactions since they correspond to the average price that all traders have paid over a given time frame. Some of the most common include the 50-day. 100-day, and 200-day simple moving averages. The main difference between these three is the period used in the calculation.
Key Takeaways
- A simple moving average is a technical indicator related to asset prices that is considered to be a low-risk area to buy and sell assets.
- Types of SMAs include the 50-day, 100-day, and 200-day moving averages.
- The data points during the noted period are added together and that sum is divided by the total number of periods to get the simple moving average.
- The main difference between the 50-day, 100-day, and 200-day simple moving averages is the total period used to determine the average of the data set.
What Is a Simple Moving Average?
Technical analysis is a trading strategy that involves the use of statistical trends and tools to identify trading opportunities. It typically relies on past performance to make predictions about future trends. Technical analysts use metrics like prices and trading volume and translate them into charts and graphs in their analysis.
A moving average is commonly used in technical analysis. It is an arithmetic mean of a certain number of data points. Many technical traders use moving averages to help them choose where to enter or exit a position. This then causes these levels to act as strong support or resistance.
There are several classifications of moving averages, including the exponential moving average (EMA) and the simple moving average. As noted above, traders consider an SMA to be a low risk when it comes to making transactions. That's because SMAs relate to the average price traders pay over a specific period.
You can use the following formula to calculate the SMA for an asset or security:
SMA = (A1 + A2 + ... An) ÷ n
where:
An = thepriceatperiodn
n = thetotal numberofperiods
An exponential moving average prioritizes the most current data points rather than all data points in the observation period.
50-Day vs. 100-Day vs. 200-Day Simple Moving Avearge
We've already established that a simple moving average is the average price that traders pay for an asset or security over a specific period. Some of the most commonly used periods for SMAs are the 50-day, 100-day, and 200-day simple moving average, which we examine below. Whether you use the 50-day, 100-day, or 200-day moving average, the method of calculation (using the formula above) and how the moving average is interpreted remains the same.
The difference between a 50-day, 100-day, and 200-day SMA is the number of periods used in the calculation. So:
- The 50-day moving average is calculated by summing up the past 50 data points and dividing the result by 50
- The 100-day moving average is calculated by summing the past 100 days and dividing the result by 100
- The 200-day moving average is calculated by summing the past 200 days and dividing the result by 200
A 50-day moving average is equal to the average price that all investors paid for the asset over the past 10 trading weeks (ortwo and a half months), making it a commonly used support level. Similarly, the 100-day and 200-day moving averages represent the average price over the past 20 and 40 weeks respectively, which is used to suggest a relatively cheaper price compared to the price range over most of the past year.
Once the price falls below the average, it may act as resistance because individuals who have already taken a position may consider closing the position to ensure that they do not suffer a large loss.
As of Dec. 11, 2023, the S&P 500's 50-day, 100-day, and 200-day moving averages were 4,393.53, 4,423.11, and 4,302.72, respectively.
How to Trade the Simple Moving Averages
You can use SMAs to identify opportunities to buy and sell assets and securities, depending on which classification you use.
When prices graze above the average level, it indicates support or that the trend is up, which means that it may indicate an opportunity to buy. Similarly, the trend may see resistance or be going down when prices hover just below the average. At this point, you may want to consider selling off the asset or security.
One thing to note, though, is that critics of technical analysis say that moving averages act as support and resistance. The rationale is that so many traders use these indicators to inform their trading decisions.
Of course, following moving averages may not necessarily net you a profit. That's because no strategy is foolproof. As with any other discipline, you must do your research and due diligence before making any trades.
What Does a Moving Average Tell You?
A moving average is an indicator used in technical analysis. Traders use it to determine trends in securities prices. To calculate the moving average, traders use a certain time and add up all the data points within that timeframe. The result is then divided by the total number of periods.
For instance, for a 100-day moving average, add up all the prices for an asset during that timeframe, then divide that sum by 100.
What Is the Golden Cross Moving Average?
The golden cross refers to a technical indicator involving two moving averages. A golden cross occurs when a short-term moving average crosses above a long-term moving average on a chart. For instance, a golden cross may occur when the 50-day moving average cross the 100-day moving average.
As an indicator of market momentum, it points to rising prices. As such, it is a bullish trend that alerts traders that they can expect a rallying pattern.
What Happens When a Stock Breaks the 200-Day Moving Average?
A stock that drops below the 200-day moving average indicates resistance. The buck in the trend points to a bearish shift in the stock's price. As such, it means that investors may be losing confidence in the stock and consider selling their shares if the price continues to decrease.
On the other hand, if the stock breaks above the 200-day moving average, it indicates a bullish trend. This means that the trend may be moving up as investors have more confidence in the stock and consider buying.
The Bottom Line
Technical traders use several different tools to help them find buying and selling opportunities in the market. Among the most common is the moving average. The most common moving averages are 50, 100, and 200 days. Calculating the moving average during these periods helps traders find an updated price. But what's the main difference between these moving averages? That's the total number of days used to calculate the moving average.
