What is a Simple Moving Average?

A Simple Moving Average (SMA) is a commonly used technical indicator that calculates the average price of a security over a specified number of periods. It is a basic form of moving average that gives equal weight to each data point in the calculation.

To calculate a simple moving average, the closing prices of a security are added up over a specified number of periods and then divided by the number of periods. For example, a 20-day simple moving average would add up the closing prices of a security for the past 20 days and divide the sum by 20.

The resulting value is plotted on a chart, creating a line that shows the average price over the specified time period. This line can be used to identify trends and potential support and resistance levels.

Simple moving averages are often used in technical analysis to identify changes in trend and potential trading opportunities. When the price of a security is above its moving average, it is generally considered to be in an uptrend, while a price below the moving average is considered to be in a downtrend.

Traders and investors may also use multiple simple moving averages, such as a 50-day and a 200-day moving average, to identify crossovers and potential buy or sell signals. For example, a bullish signal may be generated when the shorter-term moving average crosses above the longer-term moving average, while a bearish signal may be generated when the shorter-term moving average crosses below the longer-term moving average.