Simple Moving Average - SMA


DEFINITION of 'Simple Moving Average - SMA'

A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.

Simple Moving Average (SMA)


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BREAKING DOWN 'Simple Moving Average - SMA'

In other words, this is the average stock price over a certain period of time. Keep in mind that equal weighting is given to each daily price. As shown in the chart above, many traders watch for short-term averages to cross above longer-term averages to signal the beginning of an uptrend. As shown by the blue arrows, short-term averages (e.g. 15-period SMA) act as levels of support when the price experiences a pullback. Support levels become stronger and more significant as the number of time periods used in the calculations increases.

Generally, when you hear the term "moving average", it is in reference to a simple moving average. This can be important, especially when comparing to an exponential moving average (EMA).

To learn more about moving averages, check out What's the difference between moving average and weighted moving average?

  1. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth ...
  2. Aggregate Function

    A mathematical computation involving a set of values rather than ...
  3. Arithmetic Mean

    A mathematical representation of the typical value of a series ...
  4. Technical Analysis

    A method of evaluating securities by analyzing statistics generated ...
  5. Exponential Moving Average - EMA

    A type of moving average that is similar to a simple moving average, ...
  6. Underlying

    1. In derivatives, the security that must be delivered when a ...
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