Simple Moving Average (SMA)
A simple moving average (SMA) is the arithmetic mean of a security's closing prices over a specific number of periods, with each price weighted equally.
To calculate an SMA, add the closing prices for the chosen number of periods and divide by that number. A 50-day SMA adds the last 50 daily closes and divides by 50. Each new day, the oldest close drops out and the newest is added.
The 50-day and 200-day SMAs are among the most widely followed indicators in the market. Many investors view a stock or index trading above its 200-day SMA as being in a long-term uptrend, and below it as being in a downtrend. Financial media often report when major indexes cross these levels.
Because every price counts equally, the SMA reacts slowly to new developments. That makes it steadier and less prone to whipsaws than the EMA, but also slower to signal trend changes.
Example: a stock closes at $20, $22, $21, $23 and $24 over five days. The 5-day SMA is ($20 + $22 + $21 + $23 + $24) / 5 = $22. If the next close is $26, the $20 drops out and the new 5-day SMA becomes $23.20.