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A simple moving average is a trend following technical indicator that lags the market because it is calculated based on past prices. It is one of the most commonly used technical indicators and can help smooth out an asset’s price action by filtering out random short-term price fluctuations.
A simple moving average is a simple average of an asset over a defined number of periods. Like all moving averages, the drawback is that they are lagging indicators due to the fact that they are based on prior data. The stock can move sharply before it can show the trend changing. A shorter-term moving average has less time lag than a longer one.
The simple moving average can help identify trend direction, signal potential short-term trend changes or pullbacks, and provide dynamic support or resistance.
Calculation:
SMA( t ) = P( t ) + P( t - 1 ) + ... + P( t - n ) / n
where:
P = Price
n = number of time periods
The simple moving average calculates the arithmetic mean of a security over a number ( n ) of time periods.
