The Simple Moving Average (SMA) indicator is commonly used in technical analysis to smooth out price data over a specified time period to identify trends and potential price reversals. The SMA line is a moving average that calculates the average price of a security over a specific period. To calculate the SMA, the closing prices of the security over the chosen time period are added together and then divided by the number of periods. For example, to calculate the 20-day SMA, the closing prices of the security for the past 20 days are added together and then divided by 20.
The SMA is plotted as a line on a chart, with each point representing the security price over a specific time period. When the price of the underlying is above the SMA line, it may indicate an upward trend, while a price below the SMA line may be considered a downward trend. Since the SMA indicator gives equal weight to all prices in the time period, it may be less responsive to sudden changes in price compared to other moving averages, such as the Exponential Moving Average (EMA).
The following parameters can be adjusted based on the individual trader's preferences and risk tolerance:
Price: The SMA can be calculated using different types of price data, such as closing price, open price, high price, or low price. The most commonly used price is the closing price, but traders can choose to use other types of price data if they believe it provides a better representation of the security's performance.
Length: The number of data points that the SMA is calculated over.
Displace: The amount of ticks by which the SMA line is shifted forward or backward.
SMA Indicator on chart
*For illustrative purposes only. Not a recommendation of a specific security or investment strategy.