What Is a Simple Moving Average (SMA)?
The Simple Moving Average (SMA) is the most basic type of moving average used in technical analysis.
It calculates the average closing price over a specific number of time periods. In simple terms, you just add up the closing prices of the last “X” periods and divide by “X”.
The "moving" part comes into play as new price data becomes available—each time a new data point (like a daily close) is added, the oldest one is dropped. The average is then recalculated, resulting in a smooth line that follows the price on your chart.
Sound a bit confusing?
Don’t worry—we’ll break it down.
How to Calculate an SMA
Let’s say you’re plotting a 5-period SMA on a 1-hour chart. You would:
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Add up the closing prices from the last 5 hours
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Divide that total by 5
That gives you the average closing price over those 5 hours.
Now, repeat this process as each new hour closes, and you’ll create a moving line across the chart—your simple moving average!
If you're using a 30-minute chart, you’d still take the last 5 closing prices (over 150 minutes). On a 4-hour chart, it’s the last 20 hours of data.
You get the idea.
The good news? Most charting platforms handle the math for you automatically. But it’s still important to understand how it’s calculated—especially if you want to customize or fine-tune your indicators for different market conditions.
Knowing how the SMA works gives you the flexibility to adjust your trading strategies as the market evolves.
The Lag Effect of Moving Averages
Like most technical indicators, SMAs come with a built-in lag. That’s because they’re based on past price data, not predictions.
This means SMAs are better at showing the overall direction or momentum of recent price action, rather than forecasting the exact next move.
(So, no—they won’t turn you into a psychic! Sorry, Ms. Cleo.)
Visualizing SMAs on a Chart
Take a look at the chart below of USD/CHF on the 1-hour timeframe. We've plotted three different SMAs:
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5-period SMA
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30-period SMA
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62-period SMA
Notice how the 62 SMA reacts much slower and stays farther from the current price compared to the 5 SMA, which hugs the price more closely.
Why? Because the 62 SMA averages out the last 62 closing prices, making it slower to respond to short-term price movements.
Longer-period SMAs offer a broader perspective on market sentiment, while shorter-period SMAs are more responsive to recent price changes.
What SMAs Can Tell You
Moving averages help reveal whether a currency pair is:
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Trending upward
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Trending downward
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Or simply ranging sideways
They smooth out price noise and allow traders to focus on the bigger picture instead of reacting to every price twitch.
One Drawback: Susceptibility to Spikes
While SMAs are great for identifying trends, they can be sensitive to sudden price spikes.
A large, one-off price move can distort the average, potentially giving a false signal that a trend is starting—when in fact, nothing significant has changed.
In the next lesson, we’ll show you how to handle this problem and introduce you to another type of moving average that’s designed to respond more effectively to sudden price changes.