Simple Moving Average (SMA): What It Is and How to Use It

A simple moving average is a commonly used technical analysis tool that calculates the average price of an instrument over a specified period. It is a "moving" average because it constantly updates with each new price bar, producing a line on a price chart. We’ll discuss what the simple moving average is, how to trade it and the advantages and disadvantages of using it.

Key Takeaways:

• Simple moving average calculates the average price of an asset over a specified period, providing an average and fair value for it.

• Moving averages are often used as a trend filter, or to determine levels of support for buying or resistance for selling.

• The moving average is a lagging indicator, so traders often consider using it in conjunction with other indicators or analysis tools for confirmation.

What Is a Simple Moving Average?

Simple moving average (SMA), a tool used by traders in technical analysis, represents the average price of an instrument over a specified period of time. The average is called “moving” because it’s a single data point that recalculates with each new price bar, or candlestick. Therefore, it moves as new price data is discovered and traded, producing a line on a price chart.