The Simple Moving Average (SMA) is a technical indicator that calculates the average price of an asset over a specific number of periods. For example, a 20-day SMA adds up the closing prices of the last 20 days and divides by 20. As new prices come in, the average “moves” forward, smoothing out short-term fluctuations and highlighting the overall trend.
Systems you can build with an SMA
SMA is widely used in both beginner and advanced trading strategies. Here are a few common applications:
- A bearish signal happens when the short-term SMA crosses below the long-term SMA.
Trend Identification:
- If the price is above the SMA, it may indicate an uptrend.
- If the price is below the SMA, it may signal a downtrend.
Support and Resistance:
- SMAs often act as dynamic support or resistance levels where price may bounce.
Crossover Strategies:
A bullish signal occurs when a short-term SMA (e.g., 20-day) crosses above a long-term SMA (e.g., 50-day).