Simple moving average

Family VI · Charts & indicators

Not to be confused with exponential moving average, average true range, moving average, moving average crossover.

Simple moving average (SMA) is a trend-following indicator that calculates the unweighted average of a set of prices over a specified lookback. Each period in the window carries equal weight, and the average is recalculated as the window advances. The result is a single line that helps identify the direction of a trend.

Calculation

The SMA is computed by summing the closing prices of the chosen number of periods and dividing by that number. For example, a 10-period SMA adds the last 10 closes and divides by 10. As new data arrives, the oldest price is dropped and the newest is added, so the average moves with the market.

The formula is:

SMA = (P₁ + P₂ + ... + P_n) / n

where P represents the price for each period and n is the number of periods.

Worked example

5-period SMA of closing prices

Sum of last 5 closes10 + 12 + 14 + 16 + 1870

5-period SMA70 / 514.00

Interpretation and settings

Traders use the SMA to gauge trend direction and potential support or resistance. A rising SMA suggests an uptrend, while a falling SMA suggests a downtrend. The choice of period length varies by strategy and timeframe; common periods include 10, 20, 50, and 200, but no single period is universally optimal. Shorter periods react faster to price changes, while longer periods are smoother.

Limitations

The SMA is a lagging indicator because it incorporates past prices only. It can produce false signals in choppy markets and may whipsaw around the price during consolidation. Unlike some other averages, it does not give more weight to recent data, which can delay its response to sudden price moves.

Often confused with

exponential moving average: The exponential moving average applies greater weight to recent prices, whereas the simple moving average weights all periods equally; the EMA line turns more quickly after a price spike.
average true range: The average true range measures market volatility by averaging true range values, not price direction; the ATR line rises and falls with volatility rather than tracking price levels.
moving average: The moving average is the general category of smoothed price lines, while the simple moving average is one specific type within that category; the term 'moving average' alone does not specify the weighting method.
moving average crossover: A moving average crossover is a signal generated when two moving averages intersect, whereas the simple moving average is the individual indicator line itself; the crossover is an event, not a line.