Simple Moving Average (SMA)

The Simple Moving Average (SMA) is the most straightforward type of moving average. It adds up closing prices over N days and divides by N, giving each day equal weight.

Formula

SMA = (P1 + P2 + P3 + ... + Pn) ÷ N

where P = closing price and N = number of days.

For a 50-day SMA, add the last 50 closing prices and divide by 50.

Example

Apple (AAPL) traders commonly watch the 50-day and 200-day SMA. If AAPL has closed at an average of $180 over the last 200 days and is currently trading at $190, the stock is 5.5% above its 200-day SMA, suggesting an uptrend.

How to Interpret It

• Shorter-term SMAs (20, 50 days): Help identify recent momentum and short-term trends.
• Longer-term SMAs (200 days): Define the major trend over many months. Crossing above it is considered bullish.
• Price crossing SMA: Traders watch for when the price crosses above or below the SMA as a potential entry or exit signal.
• Multiple SMAs: Many traders plot 50, 100, and 200-day SMAs together. The order and spacing tell the trend story.

Limitations

• SMAs give equal weight to all past prices, so an old price from 50 days ago has the same influence as today's price.
• This can make SMAs slow to respond to sudden price changes.
• SMAs produce false signals in choppy, non-trending markets.
• Different traders use different timeframes (10, 20, 50, 100, 200 days), so there's no universal SMA.

Related Terms

• Moving Average — the general concept behind SMA
• EMA — Exponential Moving Average, which weights recent prices more heavily
• Trend — the overall direction of price movement
• Support and Resistance — price levels where moving averages often act as boundaries