Simple Moving Average (SMA)
Updated on March 8, 2023
A Simple Moving Average (SMA) is used to calculate the average of a selected range of prices, generally closing stock prices, by the number of periods in that range. It is an arithmetic average calculated by adding recent prices and then dividing the resulting figure by the number of time periods or occurrences in the series.
The values derived from Simple Moving Average are plotted in a chart with stock prices to form the SMA line. As new average values are plotted, the SMA line moves in a particular direction.
Benefits of SMA
Benefits of SMA are:
1. It is used as a technical indicator for studying and analysing stock prices.
2. Applying SMA to stock prices for a selected range assists traders in analyzing price movements, identifying trends and planning entry or exit points.
3. A shorter-period SMA signals a short-term trend, whereas a longer-period Simple Moving Average gives indication about a long-term trend.