Simple Moving Average (SMA)

What Is a Simple Moving Average?

A simple moving average, usually abbreviated SMA, is one of the most common tools in technical analysis. It smooths out a series of prices, such as daily closing prices of a stock, by averaging them over a fixed window of time. Because short-term price swings can make a chart hard to read, the SMA helps show the underlying direction of a price trend.

How It Works

To calculate an SMA, an analyst chooses a number of periods, such as 10 days, 50 days, or 200 days. The average of the closing prices in that window is computed. When a new day ends, the newest price is added, the oldest price is dropped, and the average is recalculated. Repeating this process produces a line that moves along with the price chart. Every price in the window carries the same weight, which is why it is called "simple."

The calculation can be written as:

SMA = (P1 + P2 + ... + Pn) / n

Here, P1 through Pn are the prices in the window and n is the number of periods.

Example

Suppose a stock closed at 10, 11, 12, 13, and 14 dollars over five days. The five-day SMA on the fifth day is (10 + 11 + 12 + 13 + 14) / 5, which equals 12. On the next day, if the stock closes at 15, the newest window is 11, 12, 13, 14, and 15, and the SMA rises to 13.

Why It Matters to Investors

Investors often watch how the price relates to an SMA. A price that stays above its moving average is often described as being in an uptrend, while a price below it may indicate a downtrend. Traders also watch for crossovers, where a shorter-period SMA crosses a longer-period one, though these signals are not guaranteed to predict future moves. The main drawback is lag: because an SMA depends on past prices, it reacts more slowly than the price itself, which is one reason some analysts prefer an exponential moving average for faster response. Results from any technical indicator should be weighed alongside other information such as support and resistance levels, trading volume, and broader market trend analysis.