Simple Moving Average

The simple moving average is easy to construct, but not always the most accurate. They have a tendency to “bark twice” — as in the example below.

Simple Moving Average Formula

To calculate a 5 day simple moving average (“SMA”), take the sum of the last 5 days prices and divide by 5.

 Day  1  2  3  4  5  6  7  8  9
 Price ($)  16  17  17  10  17 18  17  17  17
 5 Day SMA  15.4  15.8  15.8 15.8  17.2

 

On day 9 there is a big step in the simple moving average, but price has been constant at $17. The low price on day 4 not only causes a drop in the simple moving average on day 4, but also distorts the moving average on day 9 — causing a jump in value when the low price is dropped from the moving average period. That is what is commonly referred to as “barking twice.

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