Definition – What does Simple Moving Average (SMA) mean?
A simple moving average (SMA) is a technical analysis tool used by forex traders to summarize the price action of currency pair over a specific period of time. The simple moving average is calculated by adding up the closing prices and dividing by the number of periods. For example, a 5 period SMA on a 1-hour chart would be the closing prices for the last five hours added together divided by 5. A simple moving average can be calculated for any period, but the most common are 5, 10, 15, 20, 30, 50, 60, 200 – basically nice round figures.
ForexTerms explains Simple Moving Average (SMA)
Using the SMA can help a trader see the trend more easily because it smooths price action into a nice line with an obvious direction. Moreover, by applying several simple averages to the same chart, traders can watch for crossovers that may single a change in the direction of the trend. That said, simple averages can yield up false signals when price action becomes volatile, so it may be wise to use them in conjunction with other tools Most trading platforms and all trading software can automatically calculate and plot SMAs for any period the trader desires.