If you like math, you’ll like the simple moving average formula. You take the total of the closing prices and add them together. Then, you divide by the number of days. So, if you picked the 50 or the 200 SMA, you’d add up all those closing prices and divide by 50 or 200. If you pick the 5 SMA, you’d add up five closing prices and divide that by 5. But the great thing is that you already have those moving average lines set for you, and you don’t have to get your simple moving average calculator out.
SMAs are one of the foundations of technical analysis. They can be used to tell you a lot at a glance. For example, the simple moving average formula can be used as support and resistance or as a trend line.
Knowing the stock trend will help you know what to buy, especially when trading options. Knowing whether or not to buy calls (bullish) or puts (bearish) is the difference between profit and loss.
What Is The Simple Moving Average (SMA) Formula?
The Simple Moving Average (SMA) formula is a popular technical indicator used to calculate an average price over a specified period, which helps in identifying trends in stock market prices. The SMA gives equal weighting to all price data within a given period.
The formula to calculate SMA is as follows:
SMA = (Sum of closing prices over ‘n’ periods) / ‘n’
Where:
Sum of closing prices over ‘n’ periods: The total of all closing prices for a specified number of periods.
‘n’: The number of periods used to calculate the SMA.
For instance, to calculate the 10-day SMA, you would add the closing prices for the previous ten days and then divide the total by ten.
Simple Moving Average Signals
When a short-term SMA crosses above a long-term SMA, it signals the beginning of a long-term trend. You can also use the SMAs as support and resistance levels. You can customize your moving averages by choosing the different time frames you want to look at. Getting in on a moving average crossover is usually a bit more forgiving of a strategy, but that doesn’t mean you should fat-finger the trade.
The SMA is used to smooth out volatility. This makes it easier to see a price trend. If the SMA points up, you’ll know the trend is bullish. If the SMA points down, you’ll know the trend is bearish.
Using simple moving averages, you can identify trends when trading stocks. The longer period you use for your SMA, the smoother your trends will be. The shorter your time frame, the more volatility you’ll see.
Simple Moving Average Formula Example
This is an example of the simple moving average formula studies using the ThinkorSwim platform. You’ll notice I also have VWAP on the chart as well.
Simple Moving Average Formula Crossover
The simple moving average formula is a bullish breakout pattern that the SMAs form. You get this cross when a short-term SMA crosses above a long-term SMA.
Traders like this cross because the longer-term SMAs crossing holds more weight, and the breakout is more long-term.
The most popular SMAs for the Golden Cross are the 50 and 200 SMAs. When the 50 crosses the 200, the 200 SMA, a strong resistance level, becomes support, and the uptrend becomes a bullish market.
This is a chart for AAPL, and you can see in the shaded area that the purple line is the 50 SMA, and the blue line is the 200 SMA. The 50 crossed the 200. That is the golden cross. The stock moved into a bullish trend and has continued for now. The golden cross is a popular bullish indicator for traders.
The highlighted area showed a bear flag setup. The red arrow shows where traders would go short on the flag. There was a bullish engulfing pattern that held the moving average lines. Then, there was a small cup and handle breakout.
Death Cross
Another simple moving average formula is the death cross. The death cross is a bearish signal, and it gets its name from the X it makes when the cross occurs. The death cross is typically seen as a short-term move because it does not guarantee the price will fall long-term.
Other things can cause the market to turn around even though there’s fear related to that trend. If you see the death cross occur, there will be further losses, typically short-term.
Here is the chart for AAPL that shows you the death cross. The 200 SMA is blue, and the 50 SMA is purple. They cross, and you can see the X. The 200 SMA, which used to be supported, becomes resistant. The crosses are an easy, simple moving average trading strategy. Exponential moving average crosses are important to watch for short-term reversals.
The first two arrows on the chart showed a falling wedge pattern. The next three arrows made up a rising wedge pattern. Two of the last three made up a double-top pattern.
Which Moving Average Is Best?
Here are the best moving average lines:
- Nine exponential moving averages & 20 EMA, good for intraday trading
- Or 13 ema instead of 9 and 20
- 50 simple moving average, good for longer-term trend trading
- 200 sma. Some like the 100 sma as well. Both are good for identifying trends
Final Thoughts on Simple Moving Average Formula (SMA)
Using the SMAs to find support and resistance is a great tool. SMA support and resistance are good for long-term or swing trading, such as following the crosses. These indicators tell you what direction the market is moving.
You do not want to make blind trades, so reading charts and using technical analysis are key.
We can’t rely on just one indicator when making trading decisions. Using the SMA with other technical indicators is essential to have an edge and win this game!
Frequently Asked Questions
Example of the Formula for Moving Averages:
- Example: 50 sma
- Add up all of the closing prices during 50 days, then divide by 50
- This is done automatically by adding an indicator
The formula for the 20-day simple moving average line is calculated by adding up the prices over 20 days and then dividing that number by 20. This is done automatically within your brokerage platform.
How to set a simple moving average:
- Log in to your brokerage account
- Go to filter studies
- Edit filter studies
- Find the moving average study
- Edit the moving average lines per your preferences
Common simple moving average lines:
- 50-day SMA
- 100-day SMA
- 200-day SMA
The five-day simple moving average line (SMA0 adds up the five recent prices on a stock and then divides the number by five.
