Moving Average (SMA)
A line connecting the average of closing prices over a set period — a basic tool that smooths out a stock's trend.
SMA(n) = average of closing prices over the last n days
When the price is above the 200-day line and sloping upward, it is read as a long-term uptrend.
In plain terms
Daily stock prices jump around, which makes the bigger picture hard to see. A moving average takes the closing prices of the last several days (say, 20) and averages them into a smooth line.
It flattens out the jitter so you can see at a glance whether the "big picture" is heading up or down. The longer the period (200 days, for example), the slower the line moves and the longer the trend it reflects.
What it tells you
When the price sits above a long-term moving average (the 200-day line, for example), the broad trend is commonly read as rising; below it, as falling.
Viewing several periods together (20, 50, and 200 days) lets you gauge short-, medium-, and long-term trends on one screen, which is why it serves as the most basic charting tool.
Formula
SMA(n) = average of closing prices over the last n days (the 20-day, 50-day, and 200-day lines are commonly viewed together)
What high or low means
When the price is above the 200-day line and sloping upward, it is read as a long-term uptrend. When a shorter line (the 50-day, for example) crosses above a longer one (the 200-day), it is often interpreted as a signal of a turn upward (a golden cross).
Conversely, when the shorter line crosses below the longer one, it is read as a signal of a turn downward (a death cross).
A moving average is an average of prices already past, so it always lags by a beat. When a trend shifts suddenly, it reports the turn late.
In a directionless, sideways market the lines tangle together often and the signals lose their meaning.
Like RSI and MACD, it looks only at price movement, not at the company's value. It is a reference for trends, not in itself a suggestion to buy or sell.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see Moving alongside the sector benchmark.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.