Simple Moving Average (SMA)

A simple moving average (SMA) smooths a stock's price by averaging its closing prices over a set number of periods, such as 20 or 50 days. As each new day is added the oldest drops off, so the line glides beneath the jumpy price and reveals the underlying trend. Every day in the window counts equally.

Investors lean on SMAs in a few ways:

• Trend read: price above a rising SMA points to an uptrend, price below a falling one to a downtrend. The slope of the line matters as much as which side price sits on.
• Common windows: the 50-day SMA tracks the medium-term trend and the 200-day the long-term one, and many investors watch how price behaves around these two.
• Dynamic support: in a steady trend, price often pulls back to a key SMA and bounces, so the average can act like a moving floor or ceiling.
• The lag: because it averages the past, an SMA always turns after price does, so it confirms trends rather than predicting them. Chasing every cross is the classic trap.

Take a stock whose last five closes were $48, $52, $50, $54 and $56. Its 5-day SMA is their average, $52. If tomorrow it closes at $60, the window rolls forward, the $48 drops off, and the average steps up to about $54.40, lagging behind the jump.