Stock Trading

Moving Average, Simple Back to Index


The Simple Moving Average is calculated by summing the closing prices of the security for a period of time and then dividing this total by the number of time periods. Sometimes called an arithmetic moving average, the SMA is basically the average stock price over time.
Note that because the Simple Moving Average gives equal weight to each daily price, the longer the time period studied the greater the smoothing out of recent market volatility. Long-term moving averages smooth out all the minor fluctuations showing only longer-term trends. Shorter-term moving averages will show shorter term trends but at the expense of the long term.
Most of the time prices are on one side or the other of the moving average. As trends develop, the moving average will slope in the direction of the trend, showing the trend direction and some indication of its strength based on the steepness of the slope.