What is a Simple Moving Average?
Quick Answer: A simple moving average smooths price by averaging closes over a set period. Traders use SMAs to define trend direction, dynamic support or resistance, and crossover signals between short- and long-term averages.
What is SMA (Simple Moving Average)?
SMA is a technical indicator that calculates the average price of a security over a specific number of periods, giving equal weight to all data points. The SMA smooths price data to identify trend direction. Common periods include 20-SMA, 50-SMA, and 200-SMA.
How SMA is Calculated
Add up closing prices for N periods, then divide by N. For example, a 20-period SMA adds the last 20 closing prices and divides by 20.
Trading with SMA
- Trend identification: Price above SMA = uptrend, below = downtrend
- Dynamic support/resistance: SMA acts as bounce levels
- Crossover signals: Price crossing SMA signals trend change
- Multiple SMAs: 50/200 crossover (Golden/Death Cross)
SMA vs EMA
SMA gives equal weight to all prices, reacting slower to recent changes. EMA weights recent prices more heavily, responding faster to price action. Short-term traders prefer EMA, long-term traders prefer SMA.
Related Terms
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