A Simple Moving Average (SMA) is exactly what it sounds like: an average. You sum the closing prices over a set number of days and divide. Congratulations, you’re now ahead of half of FinTwit.

In technical analysis, the SMA acts like a market mood ring. It’s slow, steady, and best at telling you where the price has been — not where it’s about to go.

Formula:

SMA = (P1 + P2 + P3 + ... + Pn) / N

Where:

• P = closing price
• N = number of periods

Example:
If a stock closed at 158.05, 150.25, 149.00, 147.75, and 144.10 over five days, the SMA would be:

(158.05 + 150.25 + 149.00 + 147.75 + 144.10) / 5 = 149.83

Why Traders Use SMAs

Trend Identification

• Above the SMA: Bullish sentiment.
• Below the SMA: Bearish sentiment.
• SMA slopes upward: Uptrend.
• SMA slopes downward: Downtrend.

The SMA filters out the noise. It doesn’t care about what Elon tweeted today. It only respects the numbers.

Dynamic Support and Resistance

• Support: Price finds footing near the SMA.
• Resistance: Price hits the SMA and gets rejected.
  The more times price respects an SMA, the more traders trust it — sometimes irrationally.

Popular SMA Trading Strategies

1. Price Crossover

• Bullish crossover: Price moves above the SMA = potential buy signal.
• Bearish crossover: Price dips below the SMA = potential sell signal.

2. Moving Average Crossover

• Golden Cross: 50-day SMA crosses above 200-day SMA. Welcome to FOMO land.

• Death Cross: 50-day SMA dips below 200-day SMA. Cue panic tweets.

To learn more about how moving averages fit into swing trading, check out Swing Trading Success Rate.

Big funds love the 200-day SMA. It’s the technical equivalent of comfort food.

SMA vs. EMA: Choose Your Fighter

Feature	SMA	EMA
Weighting	Equal for all periods	Heavier on recent prices
Reaction to price changes	Slower	Faster
Best for	Long-term trends	Short-term trading
Calculation	Basic average	Exponential smoothing

EMA is twitchier. SMA is chill. Use whichever fits your blood pressure.

Advantages of Using SMA

• Easy to Calculate: Even your cousin who trades on Robinhood gets it.
• Good for Big Picture: Cuts through intraday chaos.
• Flexible Timeframes: Works for 5, 10, 50, 200 days — or whatever fits your trading plan.

Also, relative strength combined with moving averages can offer major trading edges — explore how to find winning stocks with relative strength.

Limitations of SMA

• Lags Behind: It’s like driving with a rearview mirror.
• Equal Weight Bias: A closing price from 1999 counts just as much as yesterday’s.
• False Signals in Volatile Markets: Choppy prices can trick the SMA into giving bad signals.

In short: SMA is loyal, but not always the sharpest tool.

Pro Tip: Combine SMA with Other Indicators

Don’t treat SMA like it’s a crystal ball. Pair it with:

• RSI (Relative Strength Index): For momentum checks.
• MACD (Moving Average Convergence Divergence): For trend confirmation.

One indicator rarely tells the whole story. Good trading means stacking edges, not betting the farm on one metric.

You might also want to learn how to use the relative strength line to confirm trends faster.