The smoothed moving average (SMMA) bears some similarities to the simple moving average in the sense that they are both used to measure the direction of a trend. However, the smoothed moving average is a type of exponential moving average (EMA) that does not remove any old values and incorporates them in all calculations. This is quite different from the simple moving average (SMA), which removes older values and is applied to a specific period used in all calculations.
Characteristics of the smoothed moving average
The smoothed moving average is generally not calculated from the values of a specific number of periods, but it includes all the values that are available within a given range. This is a major characteristic of the smoothed moving average. It typically does not cover a specific period; instead, it uses all available data in its calculations.
The smoothed moving average is quite similar to the exponential moving average as it assigns a lesser weight to historic prices than current prices, which is exactly what the exponential moving average does.
Therefore, the smoothed moving average is a crossover of the simple and exponential moving averages because it does the same job that other moving averages do: minimising the noise in price data and accurately tracking the price trend of an asset.
Chart 1: EUR/GBP daily chart with SMMA
How is the smoothed moving average calculated?
The smoothed moving average is calculated by subtracting the previous period’s smoothed moving average from the current period’s price. The result is then added to the previous period’s smoothed moving average to find the current period’s smoothed moving average.
The SMMA is calculated using the formula below:
The first value for the Smoothed Moving Average is calculated as a Simple Moving Average (SMA):
SUM1=SUM (CLOSE, N)
SMMA1 = SUM1/ N
The second and subsequent moving averages are calculated according to this formula:
SMMA (i) = (SUM1 – SMMA1+CLOSE (i))/ N
SUM1 – is the total sum of closing prices for N periods;
SMMA1 – is the smoothed moving average of the first bar;
SMMA (i) – is the smoothed moving average of the current bar (except the first one);
CLOSE (i) – is the current closing price;
N – is the smoothing period.
How to use the SMMA
The SMMA is used in much the same way as any other moving average. For example, you could use two of them to find trade entries as they cross over each other. This is exactly how you would use the simple moving average (SMA) and the exponential moving average (EMA).
One of the most popular ways that traders use the SMMA is as a support level during an uptrend and as a resistance level during a downtrend. The smoothed moving average is quite good at accurately following long-term trends because it moves quite slowly due to the impact of the older values on the current reading.
Trend traders may find the SMMA quite useful at keeping them in long or short trades depending on the trend direction. The SMMA lessens the impact of sudden price moves by smoothing out the noise, so you may get into trades a bit late, and you might also exit your trade much later.
This is a fact that most trend traders are aware of, and they typically use other methods to lock in their profits once they are in a long or short trade to minimise the gains that they may give up if they are late out of a trade.
Chart 2: EUR/GBP daily chart with SMMA potential trade entries
The chart above illustrates several instances where you could have entered into a long trade at locations where the price crossed above the 9-period SMMA. The same is true for that one point where you could have entered into a short trade after the price crossed below the SMMA indicator.
You can also see that there are several points where the SMMA issued a false signal, resulting in some losing trades, but the profitable trades were much bigger than the losing ones. This is one of the simplest ways in which you could use a moving average.
The bottom line
The smoothed moving average (SMMA) indicator is used in much the same way as the simple moving average (SMA) and the exponential moving average (EMA), but there are slight differences between it and the other moving averages.