What is Moving average (SMA)?
Sirg'aluvchi o'rtacha (SMA)
In short
The average of the last N closing prices. Smooths out noise to show the trend direction (e.g. the 50- and 200-day).
Also known as: SMA, MA
A simple moving average (SMA) is the plain average of the last N closing prices. It is called "moving" because each new period drops the oldest price and adds the newest, so the average slides along the chart.
Formula
SMA(N) = (C₁ + C₂ + … + Cₙ) ÷ N, where C is the closing price.
Popular periods
- 20-day — short-term direction (roughly one month of trading).
- 50-day — the medium-term trend.
- 200-day — the long-term trend; many investors watch whether price is above or below it.
How it is used
- Trend filter: price above a rising average is a sign of an uptrend.
- Dynamic level: in strong trends price often pulls back to the 20- or 50-day average and bounces.
- Crossovers: the 50-day crossing above the 200-day is a golden cross; crossing below is a death cross.
Limitations
An SMA is built from past prices, so it always lags: it shows a trend change several days after it happens. In sideways markets price crosses the average over and over, producing lots of false signals. When a faster reaction is needed, traders use the EMA.
Each high (HH) and each low (HL) is above the previous one. The blue line is the moving average — it lags behind price.
In an uptrend price pulled back from $61.40 to the 20-day average (~$59.07); the pullback candle dipped to $59 and closed green. Entry above its high ($60.31) at $60.35; stop below the pullback low at $58.80 (risk $1.55); 2R target at $63.45.
Example
Illustrative case, a 5-day SMA. The last five closes: $20, $21, $22, $21, $23.
- Sum: 20 + 21 + 22 + 21 + 23 = $107.
- SMA(5) = 107 ÷ 5 = $21.40.
The next day the stock closes at $24. The oldest price ($20) drops out and the new one is added:
- New sum: 21 + 22 + 21 + 23 + 24 = $111.
- New SMA(5) = 111 ÷ 5 = $22.20.
Price is at $24 and the average at $22.20 — price is above a rising average. Notice also that price rose $1 that day while the average rose only $0.80: it always trails price.
Mistakes and tips
Treat the average as a zone, not an exact line — price poking slightly through it and coming back is normal.
Don't rely on moving-average crossovers in sideways markets: they generate many false signals.
Don't keep changing the period to fit results — common values like 20, 50 and 200 get the most attention.
Frequently asked questions
- Why is the 200-day moving average important?
- It is a widely used measure of the long-term trend. Many institutional investors and traders watch it, so price often reacts around it.
- Which is better, SMA or EMA?
- Neither is simply better. The SMA is smoother and gives fewer false signals; the EMA reacts faster but is also more sensitive to noise.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
- Trend: swimming with the currentHH/HL structure, trendlines and channels, the 20/50/200-day averages, buying pullbacks and the signs that a trend is ending.Open lesson · 11 min
- Fibonacci: retracements, the golden pocket and targetsPicking the right swing, the 38.2/50/61.8/78.6% levels, the golden pocket, confluence and 1.272/1.618 extensions to plan an entry, stop and target.Open lesson · 12 min
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