Simple Moving Average (SMA) Explained

Babypips Elementary - Grade 4

What does SMA stand for in trading?

Simple Moving Average.

How is a Simple Moving Average (SMA) calculated?

Add the closing prices of the last X periods and divide the sum by X.

What does the “moving” in moving average refer to?

As each new period closes, the oldest data point is dropped and the average is recalculated, so the value moves along with price.

If you plot a 5-period SMA on a 1-hour chart, what data is averaged?

The closing prices of the last 5 hours.

What happens to the SMA line when you increase the period length?

It becomes smoother and lags farther behind current price because more data points are averaged.

How does a 62-period SMA compare to a 5-period SMA in terms of responsiveness?

The 62-period SMA reacts much more slowly to price changes than the 5-period SMA.

What is the primary purpose of using an SMA on a chart?

To smooth price action, filter out noise, and help identify the overall trend direction.

Does an SMA predict future price direction?

No. It is a lagging indicator that reflects past price action and shows current trend direction with a delay.

What market information can multiple SMAs of different lengths provide?

They show the general sentiment/trend (up, down, or ranging) and how quickly prices are changing.

Why are SMAs susceptible to ‘spikes’?

A sudden large price move is included in the average and can distort the SMA, creating possible false signals.

Which SMA will stay closest to current price: 10-period or 50-period?

10-period SMA because it contains fewer data points and reacts faster.

What type of indicator is an SMA: chart overlay or separate-window?

Chart overlay; it is plotted directly on the price chart.

If prices are above a rising SMA, what is the likely trend?

Uptrend.

If prices are below a falling SMA, what is the likely trend?

Downtrend.

Why is it important to understand how an SMA is calculated?

Knowing the calculation lets you tweak the period length and adapt strategies when market conditions change.