Simple Moving Average Filters

A simple Moving Average (SMA) is one of the most common filters used on stock or asset price information. The primary use for the filtered data is to reduce or eliminate high frequency price fluctuations in order to visualize the overall trend and also used as an indicator of price momentum. When used as an indicator of price momentum, the asset has positive momentum when the asset price is above the moving average and negative momentum when the asset price is below the moving average.

One of the most common moving average filters for asset prices is the 10-month simple moving average (SMA10) filter. For this filter, the 10 most recent monthly price values are averaged together.

SMA10(n) = 1/10*(P(n) + P(n-1) + P(n-2) + ... + P(n-9))

The figure below shows the price of S&P 500 total return along with a 10-month Simple Moving Average (SMA10).

The Price filtering action, or frequency response, of 10-month simple moving average filter is shown in the figure below. The sample frequency is once per month (fs=1/month). 3dB corner frequency is 0.0449fs = 22.27 months.

 

Disclosure:

The information presented here is the opinion of the author and may quickly become outdated and is subject to change without notice. All material presented in this article are compiled from sources believed to be reliable, however accuracy cannot be guaranteed. No person should make an investment decision in reliance on the information presented here.

The information presented here is distributed for education purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or participate in any particular trading strategy.

Performance data showing past performance results is no guarantee of future returns.

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