Simple Moving Average (SMA)
In short
Average price over N periods — smooths noise to show the trend
Take the last 50 days of prices and average them. That's the 50-day SMA. It smooths out daily noise so you can see the real trend. Price above its SMA = uptrend; below = downtrend.
SMA equally weights all prices in the lookback period. Common periods: 20 (short-term), 50 (medium-term), 200 (long-term trend). The 200-day SMA is widely watched by institutions. Price above 200 SMA is considered a bull market condition.
Formula
SMA(n) = (P₁ + P₂ + ... + Pₙ) ÷ nRelated concepts
- Exponential Moving Average (EMA) — Like a regular moving average but it pays more attention to recent prices. If a stock just had a big move, the EMA reacts faster than the SMA. Traders use EMA crossovers to spot trend changes early.
- MACD — MACD compares two moving averages to show momentum. When the fast line crosses above the slow line, it's a buy signal. Cross below = sell signal. Like two runners — when the faster one pulls ahead, momentum is shifting.
- Moving Average Crossover — The golden cross (50-day crosses above 200-day MA) is one of the most famous buy signals. The death cross (50-day crosses below 200-day) is a sell signal. It's simple but followed by many professional traders.
- Bollinger Bands — Three lines around a stock's price: a middle average and two outer bands. When the price touches the upper band, it might be overbought. Touch the lower band, possibly oversold. When the bands squeeze together, a big move is coming.