Simple Moving Average (SMA)
The arithmetic mean of prices over a set number of periods, where each data point carries equal weight.
An SMA is the average of closing prices over a set period, with every point weighted equally. The 50 and 200-day SMAs are the most-watched support and resistance levels in any market.
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.
Simple Moving Average (SMA) Example
Say EUR/USD has closed above its 200-day average for eight straight months, pulling back to touch it twice and bouncing both times. Long-term funds defend that line because their mandates reference it, which is why the touch keeps holding.
How Traders Use Simple Moving Average (SMA)
Use the 50 and 200 for regime: above both means bull regime, below both means bear. Buy touches of a rising SMA with stops beneath. In chops that saw across it, switch off and wait.
Related Terms
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