What is 'Simple Moving Average  SMA'
A simple moving average (SMA )is an arithmetic moving average calculated by adding recent closing prices and then dividing that by the number of time periods in the calculation average. 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 that same number of periods. Shortterm averages respond quickly to changes in the price of the underlying, while longterm averages are slow to react.
As shown in the chart above, many traders watch for shortterm averages to cross above longerterm averages to signal the beginning of an uptrend. Shortterm averages can act as levels of support when the price experiences a pullback.
BREAKING DOWN 'Simple Moving Average  SMA'
A simple moving average (SMA) is customizable in that it can be calculated for a different number of time periods, simply 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, which gives the average price of the security over the time period. A simple moving average smoothes out volatility, and makes it easier to view the price trend of a security. If the simple moving average points up, this means that the security's price is increasing. If it is pointing down it means that the security's price is decreasing. The longer the timeframe for the moving average, the smoother the simple moving average. A shorterterm moving average is more volatile, but its reading is closer to the source data.
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Analytical Significance
Moving averages are an important analytical tool used to identify current price trends and the potential for a change in an established trend. The simplest form of using a simple moving average in analysis is using it to quickly identify if a security is in an uptrend or downtrend. Another popular, albeit slightly more complex analytical tool, is to compare a pair of simple moving averages with each covering different time frames. If a shorterterm simple moving average is above a longerterm average, an uptrend is expected. On the other hand, a longterm average above a shorterterm average signals a downward movement in the trend.
Popular Trading Patterns
Two popular trading patterns that use simple moving averages include the death cross and a golden cross. A death cross occurs when the 50day simple moving average crosses below the 200day moving average. This is considered a bearish signal, that further losses are in store. The golden cross occurs when a shortterm moving average breaks above a longterm moving average. Reinforced by high trading volumes, this can signal further gains are in store.
There are other types of moving averages, including exponential moving average (EMA). To learn more about moving averages, check out What's the Difference Between Moving Average and Weighted Moving Average?

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