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Averages 20 closing prices with equal weight, exposing the short-term trend direction and providing a baseline for volatility-based indicators.
SMA 20 is the average closing price over the last 20 periods. Often used as a short-term trend line.
The 20-day Simple Moving Average (SMA-20) calculates the arithmetic mean of closing prices over the most recent 20 trading days, representing approximately one month of trading activity. This intermediate short-term indicator is widely used in technical analysis for identifying trends, timing trades, and setting Bollinger Band midlines. SMA-20 balances responsiveness with stability.
The calculation:
SMA-20 = Sum of last 20 closing prices / 20
Why SMA-20 matters:
- Monthly trend: Reflects roughly one month of price activity
- Bollinger Band center: Standard middle line for Bollinger Bands
- Trading benchmark: Popular among active traders for timing
- Dynamic support/resistance: Often acts as price pivot point
Interpreting SMA-20:
- Price above SMA-20: Near-term trend is bullish
- Price below SMA-20: Near-term trend is bearish
- SMA-20 slope: Direction indicates trend momentum
- Distance from SMA-20: Overextension may lead to mean reversion
Trading applications:
- Trend identification: Price position relative to SMA-20 defines trend
- Mean reversion: Price tends to return to SMA-20 after extensions
- Crossover signals: SMA-20 crossing SMA-50 generates signals
- Pullback entries: Buy dips to rising SMA-20 in uptrends
Bollinger Band connection:
Upper Band = SMA-20 + (2 × Standard Deviation) Middle Band = SMA-20 Lower Band = SMA-20 - (2 × Standard Deviation)
SMA-20 in context:
- vs. SMA-10: Smoother, fewer false signals
- vs. SMA-50: More responsive to recent changes
- Crossing SMA-50: Often signals intermediate trend change
Limitations:
- Lagging nature: Confirms trends rather than predicts them
- Range-bound markets: Less useful during sideways consolidation
- Equal weighting: Old and new prices weighted equally
SMA-20 offers a practical balance between responsiveness and smoothing, making it suitable for swing traders and active investors. Its role as the Bollinger Band centerline makes it particularly useful for volatility-based analysis.