A simple moving average is the simplest type of moving average (DUH!).
Basically, a simple moving average is calculated by adding up the last
"X" period's closing prices and then dividing that number by X.
If you plotted a 5 period simple moving average on a 1-hour chart,
you would add up the closing prices for the last 5 hours, and then
divide that number by 5. Voila! You have the average closing price
over the last five hours! String those average prices together and you
get a moving average!
If you were to plot a 5-period simple moving average on a 10-minute
chart, you would add up the closing prices of the last 50 minutes and
then divide that number by 5.
If you were to plot a 5 period simple moving average on a 30 minute
chart, you would add up the closing prices of the last 150 minutes and
then divide that number by 5.
If you were to plot the 5 period simple moving average on the 4 hr. chart... Okay, okay, we know, we know. You get the picture!
Most charting packages will do all the calculations for you. The
reason we just bored you (yawn!) with a "how to" on calculating simple
moving averages is because it's important to understand so that you know
how to edit and tweak the indicator.
Understanding how an indicator works means you can adjust and create different strategies as the market environment changes.
Now, just like almost any other indicator out there, moving averages
operate with a delay. Because you are taking the averages of past price
history, you are really only seeing the general path of the recent past
and the general direction of "future" short term price action.
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