Simple Moving Average (SMA)
The Simple Moving Average
The Simple Moving Average (SMA) is one of the most widely used and easiest-to-understand technical indicators. It smooths out price data by calculating the average closing price over a specific number of periods, helping you see the underlying trend without the noise of daily price fluctuations.
How It Is Calculated
The SMA is calculated by adding up the closing prices for a given number of days and dividing by that number. For example, a 20-day SMA of Safaricom (SCOM) adds up the last 20 closing prices and divides by 20.
Formula: SMA = (P1 + P2 + P3 + ... + Pn) / n
Where P is the closing price and n is the number of periods.
Common SMA Periods
- 20-day SMA — Short-term trend. Useful for swing traders looking at price movements over several weeks.
- 50-day SMA — Medium-term trend. Widely watched by institutional investors and a key benchmark for intermediate trends.
- 200-day SMA — Long-term trend. Considered the dividing line between a stock in a long-term uptrend (price above 200 SMA) and a downtrend (price below 200 SMA).
Interpreting SMA Signals
- Price above SMA — Generally bullish. The stock is trading above its average price for that period.
- Price below SMA — Generally bearish. The stock has dropped below its average.
- SMA crossovers — When a shorter SMA (e.g., 50-day) crosses above a longer SMA (e.g., 200-day), it is called a "Golden Cross" and is a bullish signal. The reverse is called a "Death Cross" and is bearish.
SMA on the NSE: A Practical Example
If Equity Group (EQTY) has been trading below its 200-day SMA for several months but then breaks above it on increasing volume, this is a significant technical event. It suggests the long-term trend may be shifting from bearish to bullish, and many institutional investors will take notice.