When it comes to stock technical analysis, moving averages are definitely a topic you can't avoid. Among the many moving averages, the Simple Moving Average (SMA) is a popular choice for many traders because of its straightforward calculation logic and ease of use.
What exactly is the SMA measuring?
The core logic of the Simple Moving Average is quite simple: take the closing prices of the past N trading days, sum them up, and divide by N to get a data point. Each day, you remove the oldest price, add the new day's price, and recalculate.
Does this sound abstract? Let's illustrate with an example. Suppose the closing prices of a stock over the past 15 days are:
Week 1: 30, 35, 38, 29, 31
Week 2: 28, 33, 35, 34, 32
Week 3: 33, 29, 31, 36, 34
Calculating the first 10-day SMA point: (30+35+38+29+31+28+33+35+3