What is a 'Simple Moving Average - SMA'
A simple moving average (SMA) is an arithmetic moving average 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.
As shown in the chart below, many traders watch for short-term averages to cross above longer-term averages to signal the beginning of an uptrend. Short-term averages can act as levels of support when the price experiences a pullback.
BREAKING DOWN 'Simple Moving Average - SMA'
A simple moving average 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 shorter-term moving average is more volatile, but its reading is closer to the source data.
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 shorter-term simple moving average is above a longer-term average, an uptrend is expected. On the other hand, a long-term average above a shorter-term average signals a downward movement in the trend.