SMA (Simple Moving Average)

The Simple Moving Average (SMA) is the most fundamental technical indicator. It calculates the arithmetic mean of closing prices over a specified number of periods. Each data point is weighted equally, creating a smooth line that filters noise and reveals the underlying trend direction.

How SMA Is Used in Trading

The 200-day SMA is considered the dividing line between bull and bear markets by many institutional traders. Price above the 200 SMA suggests a long-term uptrend; below suggests a downtrend. This single level is watched by more market participants than almost any other technical reference.

SMA crossover systems are the simplest trend-following strategies. When a shorter SMA (e.g., 50-period) crosses above a longer one (e.g., 200-period), it generates a buy signal. Though lagging, these signals have historically captured the majority of major trend moves across asset classes.

SMA is the backbone of Bollinger Bands, where the middle band is a 20-period SMA. Because SMA weights all periods equally, it is less prone to whipsaws than EMA in choppy markets. This stability makes it the preferred moving average type for longer-term position traders.

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