Simple Moving Average (SMA)

A simple moving average is the arithmetic mean of a stock’s closing prices over a set number of periods. The SMA(50), for example, adds up the last 50 closing prices and divides by 50. Each day, the oldest price drops out and the newest one comes in. Common periods are 20 (roughly one month of trading), 50, 100, and 200 days.

The SMA smooths out daily noise so you can see the underlying trend. If the price is above the SMA, the stock has been doing better than its recent average. If it is below, it has been doing worse.

Longer periods produce smoother lines that change direction more slowly. The 200-day SMA is widely watched as a dividing line between bullish and bearish territory. The 50-day SMA responds faster and is used for shorter-term trend assessment.

When a short-period SMA crosses above a longer-period SMA, it is called a golden cross (bullish). When it crosses below, it is called a death cross (bearish). These are lagging signals — by the time they trigger, a good part of the move has already happened.

The simplest approach is to use the SMA as a trend filter: only buy stocks trading above their 200-day SMA, since they are in a long-term uptrend. This does not tell you when to buy, but it keeps you on the right side of the bigger picture.

Moving average crossovers (such as the 50-day crossing above the 200-day) are used as entry signals, though they work better in strongly trending markets. In choppy, sideways markets, crossover strategies tend to produce frequent small losses.