Simple Moving Average — the arithmetic mean of a security's closing prices over a defined number of periods, plotted as a smoothed trend line that filters out day-to-day noise.
An SMA is calculated by adding the closing prices of the last N bars and dividing by N. Each day the oldest price drops off and the newest price is added, causing the line to roll forward smoothly. Because every period receives equal weight, the SMA responds more slowly to recent price changes than an exponential moving average — older prices pull the average just as much as yesterday's close.
The most widely watched SMAs are the 20-day (roughly one trading month), the 50-day (about two months, the intermediate-term trend), and the 200-day (the long-term trend benchmark). The 200-day SMA in particular functions as a market-wide health gauge: indexes and individual stocks above it are broadly considered to be in uptrends; sustained breaks below it signal a shift to bearish conditions. Institutional investors frequently cite the 200-day when evaluating whether to add or reduce exposure.
The SMA generates two classic chart signals. A "golden cross" occurs when the 50-day SMA crosses above the 200-day SMA — a widely followed bullish signal associated with the beginning of longer uptrends. The reverse, a "death cross," is bearish. As a dynamic level, the 50-day SMA often acts as support during pullbacks in uptrending stocks; technicians watch for how price reacts when it revisits the line. Because the SMA uses equal weighting, it tends to produce cleaner, more stable lines than the EMA — useful for identifying the underlying trend without overreacting to short-term spikes.
This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.