Moving Averages — Understanding Price Charts
A simple moving average (SMA) takes the closing prices of the most recent set number of periods and averages them, then plots that average as a smooth l…
What a Moving Average Does
A simple moving average (SMA) takes the closing prices of the most recent set number of periods and averages them, then plots that average as a smooth line on the chart. As each new period closes, the oldest price drops off and the newest one is added — the average 'moves' forward in time.
Moving averages are used to smooth out short-term noise so traders can more easily see the underlying direction of price.
[Read the lesson: Moving Averages](/learn-to-trade/understanding-price-charts/moving-averages)
Calculating a 14-Period SMA
To calculate an SMA, add up the closing prices for the chosen number of periods, then divide by that number of periods.
**Worked Example: 14-Period SMA:** Suppose the last 14 daily closing prices (oldest to newest) for a pair are: 1.1000, 1.1010, 1.1005, 1.1020, 1.1030, 1.1025, 1.1040, 1.1050, 1.1045, 1.1060, 1.1070, 1.1065, 1.1080, 1.1090. Adding all 14 values gives 15.4590. Dividing by 14 gives an SMA of exactly 1.1042143, which would typically be rounded to about 1.1042 on a chart.
[Read the lesson: Moving Averages](/learn-to-trade/understanding-price-charts/moving-averages)
Shorter vs. Longer Moving Averages
A shorter moving average (like a 10-period SMA) reacts more quickly to recent price changes, while a longer moving average (like a 50-period or 200-period SMA) reacts more slowly and reflects a broader view of the trend.
Traders sometimes watch for a shorter moving average crossing above or below a longer one as a way of gauging shifting momentum, often called a moving average crossover.
[Read the lesson: Moving Averages](/learn-to-trade/understanding-price-charts/moving-averages)
Limitations to Keep in Mind
Because a moving average is based entirely on past prices, it naturally lags behind the current price — it tells you where price has been averaging, not where it will go next.
In a strongly trending market, moving averages can act somewhat like dynamic support or resistance, but in a choppy, sideways market, price can whipsaw back and forth across a moving average repeatedly, generating misleading signals. Like other tools in this lesson, moving averages describe probability and tendency, not certainty.
[Read the lesson: Moving Averages](/learn-to-trade/understanding-price-charts/moving-averages)