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Definition:The “Simple Moving Average” (SMA) uses a mean of prices calculated over a specified amount of time that adds the closing price of a security and divides the sum by the specified number of time periods.
Background:For example, a 20-period SMA uses the last 20 closes of each price bar, adds them together and divides by 20 to determine the average price over that time range. That average is then plotted across the chart using the last 20 periods from each point in time.Note that shorter term averages deliver a faster indication to changes in price, while longer term averages are slower to show more recent price fluctuations.
Practical Use:Typically, the best Moving Average signals occur when the price and volume of the chart being analyzed has also set up a bullish or bearish pattern. Using Moving Averages as additional confirmation of what has already been “read” in the chart can be a powerful addition to the assessment tools used by a technical analyst. |
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