Simple moving average (SMA)
The simple moving average is the average of the closing prices over the last N periods: it smooths out fluctuations and shows the underlying trend.
It's called "moving" because with each new period the latest price is added and the oldest removed, so the average moves along with the chart. The most used are 20, 50 and 200 periods: the longer the period, the slower the average and the more it describes the long-term trend.
How it's calculated
You add up the closing prices of the last N periods and divide the total by N.
Worked example
Closing prices for the last 5 days: €10, 11, 12, 11 and 13. The 5-day SMA is (10 + 11 + 12 + 11 + 13) / 5 = 57 / 5 = €11.40. If the stock closes at €14 the next day, you drop the 10 and add the 14: (11 + 12 + 11 + 13 + 14) / 5 = 61 / 5 = €12.20.
How to read it
A price above the moving average usually indicates an uptrend, below it a downtrend. When the price crosses the average, many read it as a possible change of direction.
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