The simple moving average is neither more nor less than the simplest way to calculate a moving average. It is an arithmetic mean in which the sum of the last N prices (P) will be taken (remember, the most usual thing is to perform the calculation on the closing prices, from now on I will always refer to the closing prices) and is divided by N, where N is the period.
The simple moving average is usually represented by the acronym SMA.
Example: 5-period SMA applied to closing prices on a 1-hour chart. Each value that this moving average takes will be calculated by taking the closing prices of the last 5 hours, they are added and divided by 5.
Of course, you won’t have to do the calculations, the charting software will do it for you and will place the moving average drawing on the chart.
In the image below you can see how an SMA draws a smoothed line of the price, note also the delay with which it reacts when increasing the calculation periods and also how you can have a vision of the market trend by drawing several moving averages of different periods .
- The longer the period, the greater the smoothing and the slower reaction to price movements. This slower reaction is easily identifiable, observe how the longer the moving average moves further away from the price.
- Faster moving averages (shorter period) over slower moving averages (longer period) indicate bull market sentiment. Otherwise, they will indicate a downtrend.