iPhone smooth sketch drawing algorithm

CGPoint midPoint(CGPoint p1, CGPoint p2)
{

    return CGPointMake((p1.x + p2.x) * 0.5, (p1.y + p2.y) * 0.5);

}

-(void)touchesBegan:(NSSet *)touches withEvent:(UIEvent *)event
{

    UITouch *touch = [touches anyObject];

    previousPoint1 = [touch previousLocationInView:self];
    previousPoint2 = [touch previousLocationInView:self];
    currentPoint = [touch locationInView:self];

}

-(void)touchesMoved:(NSSet *)touches withEvent:(UIEvent *)event
{

    UITouch *touch = [touches anyObject];

    previousPoint2 = previousPoint1;
    previousPoint1 = [touch previousLocationInView:self];
    currentPoint = [touch locationInView:self];


    // calculate mid point
    CGPoint mid1 = midPoint(previousPoint1, previousPoint2); 
    CGPoint mid2 = midPoint(currentPoint, previousPoint1);

    UIGraphicsBeginImageContext(self.imageView.frame.size);
    CGContextRef context = UIGraphicsGetCurrentContext();
    [self.imageView.image drawInRect:CGRectMake(0, 0, self.imageView.frame.size.width, self.imageView.frame.size.height)];

    CGContextMoveToPoint(context, mid1.x, mid1.y);
    // Use QuadCurve is the key
    CGContextAddQuadCurveToPoint(context, previousPoint1.x, previousPoint1.y, mid2.x, mid2.y); 

    CGContextSetLineCap(context, kCGLineCapRound);
    CGContextSetLineWidth(context, 2.0);
    CGContextSetRGBStrokeColor(context, 1.0, 0.0, 0.0, 1.0);
    CGContextStrokePath(context);

    self.imageView.image = UIGraphicsGetImageFromCurrentImageContext();
    UIGraphicsEndImageContext();

}

The easiest way to smooth a curve like this is to use a Bezier curve instead of straight line segments. For the math behind this, see this article (pointed to in this answer), which describes how to calculate the curves required to smooth a curve that passes through multiple points.

I believe that the Core Plot framework now has the ability to smooth the curves of plots, so you could look at the code used there to implement this kind of smoothing.

There's no magic to any of this, as these smoothing routines are fast and relatively easy to implement.