A Simple Moving Average (SMA) represents a standard technical indicator, widely used by traders to get a clear picture of the market direction by filtering the price data. The SMA does not take into account the noisy and unpredictable price fluctuations that occur daily, instead it determines the average price of an asset during the set period. The period can be 10, 50, 100 days or any other timeframe that a trader would like.
SMA is calculated by taking the sum of the closing prices for the days chosen and dividing it by that number of days. The oldest data points drop off as new ones come in and the average shifts to the current period. The result of this is a neat and smooth line on a chart that helps to easily visualize the trends.
SMA is utilized by the traders to determine the market scenario, whether an asset is in an uptrend, downtrend, or sideways. A stay of price above the SMA line might be interpreted as a strong or a potential bullish uptrend signal. A dip of price below it might be viewed by traders as a sign of weakness. Furthermore, two SMAs, a long one and a short one, are widely used in many strategies to recognize trend reversals whenever the lines intersect.
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