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