Simple Moving Average
Technical IndicatorsA moving average calculated by adding the closing prices over a set number of periods and dividing by that number. Each price point receives equal weight in the calculation.
What Is the Simple Moving Average?
The simple moving average (SMA) is the most straightforward type of Moving Average. To calculate a 20-period SMA, add the last 20 closing prices and divide by 20. Each day, the oldest price drops off and the newest is included. Because all prices are weighted equally, the SMA is slower to react to recent changes compared to the Exponential Moving Average, but it also produces fewer false signals during choppy markets.
Popular SMA Periods
The 50-day SMA and 200-day SMA are the gold standard for trend identification. When the 50 SMA is above the 200 SMA, the market is generally in a bullish phase. When below, bearish. For intraday trading, the 20-period SMA on the 1-hour chart is commonly used. The 10-period SMA captures very short-term momentum and often acts as dynamic support or resistance in strong trends on EUR/USD, GBP/USD, and USD/JPY.
SMA Limitations
The SMA's equal weighting means a price spike from 20 days ago has the same influence as yesterday's close. This can make the SMA slow to react to sudden trend changes. In strongly trending markets, the Exponential Moving Average often provides earlier signals. In ranging markets, neither performs well. The SMA's strength is its simplicity and widespread adoption, making it a reliable gauge of where other market participants see the trend.
Related Terms
Exponential Moving Average
A type of moving average that places greater weight on the most recent prices, making it more responsive to new information than the simple moving average. Commonly used periods include 12 and 26 (the basis of the MACD).
Moving Average
A widely used indicator that smooths price data by calculating the average closing price over a specified number of periods. Moving averages help identify trends and potential support/resistance levels.
MACD (Moving Average Convergence Divergence)
A trend-following momentum indicator that shows the relationship between two exponential moving averages. The MACD line, signal line, and histogram together help identify trend direction, momentum shifts, and potential entry points.
Bollinger Bands
A volatility indicator consisting of three lines: a middle simple moving average (typically 20-period) and upper and lower bands set at 2 standard deviations above and below it. The bands expand during high volatility and contract during low volatility.