SMA (Simple Moving Average)
An SMA calculates the average closing price over a specific number of periods. All periods are weighted equally. The 50-day and 200-day SMAs are the most widely watched.
Understanding the Concept
SMAs smooth out price action and reveal the underlying trend. They're slower than EMAs, which means fewer false signals but later entries. The 200 SMA on the daily chart is legendary—institutional traders watch it religiously. Price above the 200 SMA = bull market; below = bear market. SMA crossovers generate reliable signals: 50 crossing above 200 (golden cross) often precedes extended rallies. The simplicity of SMAs makes them universal—everyone's watching the same levels, which makes them self-fulfilling.
Real-World Example
Apple's stock price crosses above its 200-day SMA after months below. Institutional investors see this as a trend change signal and start accumulating. The self-fulfilling prophecy kicks in—price rallies.
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