Simple Moving Average (SMA)

As the name implies, Simple Moving Average reflects the average price of a stock value of movement within a certain time frame is simple. The average price of the most commonly used is the closing price. However, this parameter can be changed by using the opening price, highest price and others. 

Time span in question can also vary according to the settings specified by the trader himself. However, the most commonly used is between 10, 20, 30, 50, 100 and 200 days. The shorter period of time that it will produce a signal that more and more sensitive. Short period of time is generally more interest to the short-term traders. On the negative side there will be many false signals. Meanwhile, the longer the period of time that otherwise would produce a signal which is slower but effective way to reduce false signals.
 
Here is a sample calculation of 5-day Simple Moving Average to calculate the closing price for 5 days, and then the result is divided by 5 to get the Simple Moving Average.
5 + 6 + 7 + 8 + 9 = 35 35: 5 = 7
 
For example on the next day's closing price is 10. Then the computation will continue as follows:
6 + 7 + 8 + 9 + 10 = 40 40: 5 = 8
 
The values ​​of these calculations appear to be a line in the charts that can provide a signal to traders. It could be a signal signal signal to buy or sell depending on stock price movements that cross the line MA. When the price moves below the cut to the top of the MA line then generate buy signals. Conversely, if the price moves from top to bottom line of the Supreme Court cut the signal generating sales (see picture). Moving Average has been declared invalid if the closing price break has been in line outside the Supreme Court. 

Sell Signal and Buy Signal derived from SMA (50) line on PCLN

SMA lines that have a shorter period will stick closer to the stock price. This means that the MA line is more suitable for traders who have more short term time horizon. In the picture can be seen the comparison between the Supreme Court a long period by using a shorter period. 

Comparison of SMA(20) and SMA(50).  It's look that SMA(20) is more sensitive to give faster signal but more often produce the bad signals.

When observed it was obvious that all is Lagging Indicators Moving Averages are always in the back of the price. In the category as a trend following indicators, when stock prices are an uptrend it will overshadow the MA lines from the bottom, if the price is a downtrend then the MA line is overshadowing from above.
 
Simple Moving Average (SMA) also has some drawbacks that seek to overcome with the development will be WMA (Weighted Moving Average) and EMA (Exponential Moving Average). Shortage is said to be due to MA only covers a certain time period only. For example use MA (10), then the price is included only covers 10 days closing price. Then the problem of weighting in the calculation was also criticized for the same weighting used in every day. For example in MA (10), the price of the first day has the same weight (10%) by weight of the price of the last day (which is also considered to be 10%). Experts say that the price on the last day should have more weight is important because it reflects the actual conditions at that time.