Seasonal Moving Average (SMA)

What is the Seasonal Moving Average (SMA)?

The Seasonal Moving Average (SMA) is a technical analysis tool that accounts for seasonal patterns and cycles in price data. It is primarily used in analyzing markets that exhibit regular seasonal patterns, such as commodity, energy, and some stock markets. The SMA helps identify these patterns, enabling better understanding of price movements and forecasting future changes.

What is the Seasonal Moving Average Used For?

The primary purposes of the Seasonal Moving Average are to:

• Identify and analyze seasonal patterns in price movements.

• Help forecast future price changes based on historical seasonal data.

• Aid investors in making trading decisions by understanding regular market cycles.
  

How is the Seasonal Moving Average Calculated?

Calculating the SMA involves several steps:

1. Collecting Historical Data: Gather price data from several previous years to identify seasonal patterns.
   

2. Segmenting Data into Seasonal Periods: Divide the data into appropriate seasonal periods, such as monthly, quarterly, or yearly.
   

3. Calculating Moving Averages: Compute moving averages for each seasonal period. For example, for monthly seasonal data, calculate 12-month moving averages to observe yearly patterns.
   

4. Analyzing Deviations: Analyze deviations from these averages to identify when the price deviates from typical seasonal patterns.
   

How to Trade Using…