A simple moving average, commonly referred to as SMA. is a moving average that is figured by adding the closing price of the security for several time periods, then dividing the sum by the number of time periods.
Short-term averages, used mainly in day trading and swing trading, respond quickly to changes in the price, while longer-term averages are slower to react.
The most common SMA periods are 50 day, 100 day, and 200 day. That said, there are several combinations used by Trader's depending on their specific trade style coupled with the time frame they are considering.
Day Traders tend to focus on 2 day, 5 day, 10 day SMA's. Swing Traders tend to use 10day and up.
Simple Moving Averages are not usedful in every occasion. There must be a relationship between a stocks price action and a specific SMA time period for the functional indicator to be of any worth.
For example, say you notice a tendency for BRCM to bounce every time if dips to 200 day SMA. If the stock is dipping to a support level coupled with a 200 day SMA, a technical analyst will likely take a long position in that stock.
On the flip side, if BRCM has never had any reaction to the 200 day SMA, then SMA would be of no use in the analysis.
Related terms: Moving Average, Exponential Moving Average, Momentum