Simple Moving Average (SMA)
The arithmetic mean of prices over a set number of periods, where each data point carries equal weight.
A simple moving average is the most basic type of moving average, calculated by adding closing prices over a set number of periods and dividing by that number. Every price point carries equal weight, making the SMA smoother and slower to react than an EMA. The 50-day and 200-day SMA are among the most widely watched levels in any market, acting as significant support and resistance zones.
How It Works
- Sum of closing prices over N periods divided by N. A 20-day SMA adds 20 closes and divides by 20.
- Each new bar drops the oldest price and adds the latest close, creating a rolling average
- Equal weighting makes the SMA less prone to whipsaws but slower to signal trend changes
- SMA crossovers (50-day crossing above 200-day) generate widely followed signals
Trading Tips
Use the 200-day SMA as a directional bias filter. Only take longs above it, shorts below it.
The SMA is better suited for longer timeframes. For faster intraday signals, consider the EMA.
Round-number SMA periods (50, 100, 200) are more effective because enough traders watch them to create real support and resistance.
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