SMA (Simple Moving Average)

The most straightforward moving average -- equal-weight average over N candles, golden/death crosses, and common period choices.

What is the Simple Moving Average?

The Simple Moving Average (SMA) is the most fundamental moving average. It calculates the average closing price over a fixed number of candles, giving equal weight to every candle in the window.

When a new candle arrives, the oldest candle drops out of the window and the newest one enters. The average recalculates, and the SMA line moves one step forward. This produces a smooth line that tracks the general direction of price without reacting to every small fluctuation.

How It's Calculated

Simple Moving Average

SMA = (close_1 + close_2 + ... + close_N) / N

In plain English: add up the closing prices of the last N candles, then divide by N. Every candle in the window counts equally -- the oldest candle has the same influence as the newest one.

This equal weighting is both SMA's strength and its weakness. It produces a clean, easy-to-understand average, but it means the SMA reacts slowly when the price suddenly moves -- the old candles in the window "drag" the average toward where the price used to be.

Common Periods

Certain SMA periods are used so widely that they have become reference points in their own right:

20-period SMA

Represents roughly one month of daily trading (about 20 trading days). Used for short-term trend identification and as a mean reversion reference.

50-period SMA

A medium-term trend gauge. When price is above the 50 SMA, the medium-term trend is generally considered bullish; below it, bearish.

100-period SMA

Sits between the 50 and 200 as an intermediate reference. Less commonly watched than the 50 or 200, but useful as a filter.

200-period SMA

The most widely followed long-term trend indicator. Institutional traders, fund managers, and financial media all reference the 200 SMA. When price is above it, the long-term trend is considered bullish.

Do these periods work on all timeframes?

These periods were established on daily charts, where 200 candles represents roughly one trading year. On other timeframes (hourly, 15-minute, weekly), the same period numbers span different calendar durations. A 200-period SMA on a 1-hour chart covers only about 8 days on a 24-hour market like forex or crypto -- and closer to a month of trading on a stock that trades roughly 6.5 hours a day -- not a year. The concepts still apply, but the significance of each period changes with the timeframe.

Crossover Signals: Golden Cross and Death Cross

The most popular SMA strategy uses two SMAs with different periods -- a fast one (short period) and a slow one (long period). When the fast SMA crosses above the slow SMA, it suggests the short-term trend is strengthening relative to the long-term trend. When it crosses below, it suggests the trend is weakening.

A golden cross (fast MA crosses above slow MA) signals a potential uptrend. A death cross (fast crosses below) signals a potential downtrend.

Golden cross

The fast SMA (commonly 50-period) crosses above the slow SMA (commonly 200-period). This is considered a bullish signal -- shorter-term momentum is turning upward.

Death cross

The fast SMA crosses below the slow SMA. This is considered a bearish signal -- shorter-term momentum is turning downward.

These crossovers can be used directly as entry and exit conditions in Simula. However, crossover signals are lagging by nature -- by the time the fast SMA has crossed above the slow SMA, a significant portion of the move has already happened.

Crossovers lag behind price

Because SMAs use equal weights, crossover signals are always late. The golden cross confirms that the trend has already shifted -- it does not predict the shift in advance. In a whipsaw market (rapid back-and-forth price action), crossovers can generate repeated false signals. Consider combining with other indicators for confirmation.

Strengths and Weaknesses

Strengths

Simplicity: SMA is the easiest moving average to understand and explain. The calculation is transparent -- anyone can verify it with a calculator.

Widely followed: Because so many traders watch the same SMA levels (especially 50 and 200), these levels can become self-reinforcing. When a large number of traders act on the same signal, it can influence the price.

Stability: The equal weighting means SMA does not overreact to a single unusual candle. One spike does not dramatically move the average.

Weaknesses

Lag: Equal weighting means the SMA reacts slowly to price changes. The longer the period, the more lag. A 200-period SMA will not turn until well after the price has already changed direction.

Abrupt drops: When a large candle exits the window, the SMA can jump even if recent price action is stable. This is because SMA treats the oldest candle and the newest candle identically -- when a large value drops out, the average shifts.

SMA vs EMA

The most common question about SMA is when to use it instead of EMA. There is no universally correct answer -- it depends on what you value:

Choose SMA when you want a stable, widely-watched reference level (especially 50 and 200 periods) or when you want the average to not overreact to recent spikes. Choose EMA when you want faster reaction to price changes and are willing to accept slightly more noise.

Where to Go Next

EMA (Exponential Moving Average) -- the most popular alternative to SMA, with faster reaction to price changes.

Moving Averages Overview -- all 10 moving average types available in Simula.

Trend Following -- strategies built around moving average crossovers.

Entry & Exit Conditions -- how to set up crossover and threshold conditions in Simula.