Technical Glossary / Technical Indicators – Trend Indicators
Simple Moving Average (SMA)
The average of the last N closes, each close weighted equally.
Teaching sketch. It shows the shape, not a live quote and not a trade signal.
Formula
SMA = (close + close1 + ... + close N-1) / N. A common long trend average is 200. A common short one is 20 or 50.
Definition
The simple moving average is the mean close over a window. When a new bar arrives, the oldest close drops out. The line lags price by design. It answers what the typical close has been, not what the next close will be.
How it works
A rising SMA says the window's average close is climbing. Price above a rising SMA is the plain trend filter. Crossovers of a short SMA through a long SMA are a separate tool. The average itself is only the arithmetic.
How traders use it
Use one long SMA as a regime filter: only take longs above a rising 200-period line, for example. Use a shorter SMA for a trailing context. Do not require five averages to agree before you can see an obvious trend.
Common mistakes
Treating a touch of the SMA as a buy signal in a range, where price crosses the average constantly. Also using an SMA of highs and calling it the same object as an SMA of closes.
Limitations
Equal weight gives a bar from N periods ago the same vote as yesterday. That is why the line jumps when a large old bar falls out of the window. EMA was built to reduce that.
This note explains the term. A sketch shows the shape of the idea. Neither is a recommendation, a signal, or a comment on any security. Indicator settings and exchange conventions differ. Check the live chart and the contract specification before you use a number.