What is a Simple Moving Average?
Updated: March 28, 2012 at 4:52 AM
Simple Moving Average Definition. A Simple Moving Average, or "SMA" or "arithmetic mean", is an average of a predetermined number of prices over a specific time period or number of days divided by the number of entries. For example, a 26 period, commonly used by forex traders on daily charts, Daily chart SMA is the average closing price of the previous 26 days. The time period chosen is generally a parameter that can be varied based on the preference of the forex trader. An Exponential Moving Average, or EMA, is a type of statistical moving average that is similar to a simple moving average, except that more weight is given to more recent prices or data. The EMA may also be referred to as an "exponentially weighted moving average". Moving averages are frequently used in forex technical analysis to emphasize the direction or potential for change of a currency trend. The mathematical calculations tend to smooth out price and volume fluctuations, or "noise", such that misinterpretations by a forex trader are reduced. An EMA reacts more quickly to recent price changes than does a simple moving average. The 12- and 26-day EMAs are the most popular short-term averages. Typically, upward momentum is confirmed when a short-term average crosses above a longer-term average. Downward momentum is confirmed when a short-term average crosses below a long-term average.
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.