The Simple Moving Average (SMA) is one of the most widely used technical indicators in trading. It calculates the average price of a security over a specific number of periods, helping traders identify trends and potential support/resistance levels.
Quick Tip: SMA is often the first indicator new traders learn because of its simplicity and effectiveness in identifying trends.
How SMA is Calculated
SMA is calculated by adding the closing prices for a set number of periods and dividing by that number of periods:
SMA = (P₁ + P₂ + P₃ + ... + Pₙ) / n Example: 5-day SMA Prices: ₹100, ₹102, ₹104, ₹103, ₹105 SMA = (100 + 102 + 104 + 103 + 105) / 5 = ₹102.80
Common SMA Periods
Different periods serve different purposes:
| Period | Use Case | Trader Type |
|---|---|---|
| SMA 10 | Very short-term trend | Day traders |
| SMA 20 | Short-term trend | Swing traders |
| SMA 50 | Medium-term trend | Position traders |
| SMA 200 | Long-term trend | Investors |
Trading Strategies Using SMA
Strategy 1: SMA Crossover
When a shorter SMA crosses above a longer SMA, it's considered a bullish signal. When it crosses below, it's bearish.
- Golden Cross: SMA 50 crosses above SMA 200 → Strong bullish signal
- Death Cross: SMA 50 crosses below SMA 200 → Strong bearish signal
Strategy 2: Price vs SMA
A simple but effective approach:
- Price above SMA 200 → Bullish bias, look for buying opportunities
- Price below SMA 200 → Bearish bias, avoid buying or consider shorting
Strategy 3: SMA as Dynamic Support/Resistance
In trending markets, the SMA often acts as:
- Support in uptrends — price bounces off SMA
- Resistance in downtrends — price rejected at SMA
Pro Tip: Many institutional traders watch the SMA 200 on daily charts. When price approaches this level, expect increased activity.
SMA vs EMA: What's the Difference?
| Feature | SMA | EMA |
|---|---|---|
| Weight | Equal to all prices | More weight to recent prices |
| Responsiveness | Slower | Faster |
| Best for | Identifying major trends | Catching quick moves |
| False signals | Fewer | More |
Using SMA in VivaTrades
You can create powerful SMA-based strategies in VivaTrades:
- Crossover strategy: SMA 20 crosses above SMA 50
- Trend filter: Close > SMA 200
- Pullback entry: Low ≤ SMA 20 AND Close > SMA 20
- Slope check: SMA 200 today > SMA 200 (5 bars ago)
Caution: SMA works best in trending markets. In sideways/ranging markets, it can generate many false signals. Always combine with other confirmation indicators.