The Simple Moving Average Indicator Guide
The Moving Average is undoubtedly one of the most popular indicators. However, its wide popularity is not based on nothing. It is a simple but at the same time a powerful trend indicator. It clearly shows which way the price is trending, how clear the trend is, and when the reversal occurs. Today we will look at how to set up the Moving Average, how to use it, and what strategies can be implemented using this indicator.
Definition of the SMA indicator
Probably, there are no traders who haven't heard and met in their trading activity such instrument as "Moving Average". On the contrary, it is often the beginning of a full-fledged work on the market, searching for the trends. It is popular in trading, being the most frequently used instrument both singly and as a part of numerous strategies.
SMA (Simple Moving Average) is a basic tool for the player, which allows him to get some advantages at the first stage of work, learn to understand the market, to get a result from it. It is one of the Moving Average subtypes, called Simple Moving Average, and is actively used when it is important to understand the dynamics of assets.
This tool generates such an important value, as the average of its value over some time. In this case, the trader works with the average values of the value for that time period. By adding the SMA to the work area of the terminal, he will get a simple line that exactly follows the price of the asset, but on some deviation. This tool is a trending tool, it is actively used to identify the current trend. It is also particularly valuable in that it helps to see quite accurately a particular trend and its end.
SMA is simple arithmetic moving average, which differs from other MAs in that it has a different weighting factor, which here is assigned to its last indicators - they are values of some time period, they are studied with equal weight. Sometimes traders may call the tool ordinary and even simple moving average and in principle they are right - it is easy to work with and has the simplest formula in its class.
Using a Moving Average
The Moving Average indicator can be used in several ways, depending on the trader's goals. But it is most often used for:
- Determination of trend direction
To determine the direction of the trend, use the SMA or EMA of different time periods. For example, the SMA 100 on the EUR/USD for the hour clearly shows an increasing trend and looks like this:
- Finding support and resistance levels
In addition to identifying the trend, the indicator lines can also be successfully used as support and resistance levels.
- Detection of flat
Unfortunately, the markets not only move in a trend but also have temporary freezes, when the price stays in a narrow range for some time. This is a state in which the market decides in which direction to move. For the trader often such a situation looks like chaos in which it is practically impossible to trade. It is not difficult to determine the flat market condition by using Exponential Moving Average. If two lines with different periods merge or are very close to each other, it means that the market is uncertain and there is no trend.
Methods of Market Analysis with the Simple Moving Average
First of all, the SMA indicator is used to determine the trend direction. Experienced traders do not need additional tools to see the trend. They can do it with the help of a simple look at the market. Beginners get confused more often, so it is recommended to use the Moving Average indicator to determine the global direction of opening trades. If its line is pointing downward, it is better to sell the currency pair. If, on the other hand, the graph of the Moving Average is ascending, the pair is on the rise, and therefore it is necessary to consider buying the financial asset.
The greater distance of the price from the average line indicates a strong impulse. It is very likely that even if the pair continues to move in the current direction, it will at least briefly return to the midline to restore the balance. In this case, trade in the counter-trend direction should be considered after the momentum is over. When the price movement becomes stable again or it will move in a flat, you can enter the market against the main trend, if there are confirming signals.
The basic method of forecasting price reversals of a financial asset based on the SMA indicator is to analyze two averages - a fast one with a smaller period and a slow one, whose period is longer than that of the first moving average. If the averages are crossed, it means that the price turns. If the fast average crosses the slow one from the top downward, it indicates that we are in a downward trend. If, on the contrary, the bulls seize the initiative and drive the price up. The uptrend begins.
Even though the SMA indicator is universal and suitable for any currency pair and any time frame, the settings should be selected individually for each financial instrument.
Moving Average Periods
The most popular moving average periods among traders are:
- Period 21 is great for short-term trading. With this period, the price takes into account the level of the Moving Average and works as support or resistance in a strong trend. It also better defines a sharp change in the trend.
- Period 50 is ideal for medium-term trading.
- Period 100. With this setting, the moving average indicator works great as support and resistance levels. Ideal settings for daily and weekly time frames.
- The period 200/250 - is ideal for trading on currency pairs in high time frames (D1 and above), filtering out the flat and excessively rapid changes in market sentiment in the short term.
Advantages of the SMA indicator
This tool is so popular in several markets for a reason. Today, both experienced and novice players work with their indicators. Displaying the data of the average indicator of the asset value for some recent periods, the SMA can generate sufficiently serious information, because, according to the basics of fundamental and technical analysis, the information about the value will always tend to the past average readings.
In addition, it is a versatile tool that can be used both in level systems and with technical analysis figures. By generating accurate signals, the SMA greatly simplifies the process of trading in the market and can minimize players' losses.
Its advantage is that it is simple and does not require deep knowledge of the principles of market behavior. In addition, the tool has easy settings, which also will not allow the trader to make a mistake at this stage, which will result in further losses. The indicator is widely used in the market for different purposes, including complex trading techniques. It is used by traders to track current trends and to understand when a particular trend will end.
Traders have some reasons to use this tool: the ability to quickly find the current trend or flat on the market, it also confirms the presence of the trend, predicts future reversals, reversals of trends, and determines the point of profitable entry into the market. Having chosen one of these working strategies, a trader adds the SMA to the chart and can immediately start trading - signals are quite easy to identify and it is not necessary to spend a lot of time studying them.
Which Moving Average to Choose
Often many people have a question about which Moving Average to choose for intraday or long-term trading. Unfortunately, there is no universal answer to this question. Using the Moving Average indicator in the trading system is a very individual question, which each trader should carefully study and check. Some traders successfully use 10, 12, 20, and 30-period MA daily on the daily charts. But there are quite a few traders who recognize the strength of only 100 or 200 day Moving Averages combined with weekly charts. You should try to figure out what works best for your trading style. Each Moving Average works differently in individual markets and time frames. Where 10-day lines work for one, 20-day Moving Averages work for another. You should also keep in mind that different Moving Averages produce different numbers of signals. You will definitely get a lot more signals from the 10-day ones than, for example, the 50-day Moving Averages. Again, this depends on the trading style and experience of the trader.
The Principle of Moving Average Period Selection
The Moving Average period is, perhaps, the most important parameter in this indicator's settings. Ideally, the Moving Average should be a solid, dynamic support or resistance line. It means that the price should be as long as possible above the indicator (if the quotes are rising) or below it (if they are falling). Your task is to understand how to set the Moving Average so that the price does not cross the chart too often but regularly touches it. To understand what we are talking about, study the chart carefully.
Look at how the price several times "touches" the indicator without crossing it, and then returns to the same side where it was. It happens five times on the chart before the price finally breaks out of the indicator and is above it. After the breakout, we see the same pattern - the price "bounces" six times without going below the indicator before finally breaking through the moving average.
This example shows the correct selection of the period. It is with the help of such markers that you can see how well the period has been chosen - between each indicator breakout, the price bounces off the indicator several times and returns to the starting point. How to set up the Moving Average to get such a result?
Actually, there is no "secret ingredient". To determine how to tune the Moving Average optimally, all you need to do is find the appropriate period by simple brute force. Change the period values until you get a suitable result. The longer the period you set, the less often the price will cross the indicator. Indicators with a large period are referred to by traders as long indicators. The price rarely crosses such indicators. If a small period is set, the indicator is called short. It misses a lot of false signals.
Once the indicator becomes a support and resistance line, as on the example chart, leave the value and work with it.
Moving Average Trading Strategies
Now that we have got the Moving Average setup, let's move on to trading. According to the description of the moving average indicator, it displays the trend and its reversals. That is why traders most often use the simplest strategy - trading on the crossing of the price and indicator.
When trading with the Moving Average, one must remember that this indicator, like all trend indicators, is capable of giving false signals - sometimes the price crosses the indicator only to come back again after a short period. However, profits from correct signals almost always cover losses from trades based on false signals.
As you know, in many ways the goal of working in the market is to constantly solve the difficult task of finding reliable signals. It is important to understand that there is no money to be made by trying to guess the outcome of trades. Working on a strategy is what can make trading productive. The feature of the "Masculine" system - it is simple, suitable for those who prefer to work with technical analysis, and uses signals from simple instruments: Alligator, RSI, and the Simple Moving Average we are considering. The profitability of this system - up to 85%, is a great way for the player to quickly increase his deposit. The Simple Moving Average and RSI will act as signal filters here. The Alligator will promptly inform the player about the beginning of the movement, while the RSI will be useful for finding the moment of trend change and its duration. As a result, the accurate basic signal will allow you to make a sufficient profit.
To place a long position, expect the following picture: the RSI must show an uptrend, crossing above 50; the Alligator, having broken out the Moving Average, must also show an upward trend. To place a short position, wait for this pattern: the RSI should now be trending downwards, crossing 50 and heading down; and the Alligator, having broken out the sliding band, is also pointing down.
This simple trading system also uses the Simple Moving Average signals in its work, has a simple principle of use, but allows you to steadily increase your profits. Why is it the intriguing name of the Profit Magnet? Its advantage is in the exact tools used, which create a smoothly working mechanism that can lead a player to a positive result: the SMA, the Alligator, and the RSI.
The alligator indicates the times when the price, waking up from sleep, demonstrates the fluctuations. The SMA is no less important because it detects the reversal moments and anticipates the trends (here we will need three lines of the tool with the settings of 75, 100, 120); RSI is used to prevent erroneous entries in the trades. As a result of the complexity of these tools - the ability to track the upcoming reversal in some direction of the asset and conclude the contract, which will bring the player the ideal outcome of the transaction.
To open a long position, the system's instruments must show the following: the RSI must break out the trend at 50; the Alligator must break out the Moving Average curves, going upwards. To open a short position, the system tools must show the following situation: RSI must break out the trend at 50 when going down; Alligator, going down, must break out the Moving Averages.
This interesting trading system is a kind of novelty, though the set of its instruments is of course familiar to a trader. What are the peculiarities of this system? It is universal, simple, and works on a simple principle. At the same time, its accuracy is pretty high, which makes it especially attractive. The system works with various markets, time frames, and assets. It is based on the use of simple tools, such as SMA, MACD, and RSI, which together can accurately predict the prospective movements of the asset. Thus, the SMA is needed to identify the trend - its direction and reversal (here we will need two lines of this tool with the settings of 25 and 50). SMA is best combined with other tools. The RSI here, by crossing the 50 level, can confirm a fresh trend, and the MACD can catch the exact moment of market breaks, which will be profitable for entering the trade.
For a Buy order, the following picture is required: the RSI must break out 0, going up; the SMA must cross one another going up; the MACD must "agree" with this, confirming it by breaking out the 0 level, going up. For the Sell order, the market must show the following pattern: the RSI must break out 0 in a downward direction; the SMA must cross one another also in a downward direction; the MACD must again "agree" with this situation, confirming it by breaking out the 0 level in a downward direction.
Talking about this trading system, we want to reiterate that guessing the market movements is not a productive way of working with the forex market. Without using the basic tools here, the investor is not able to trade positively and talk about stable profits. The peculiarity of this trading strategy is that it is highly effective, but also simple and clear. For work, the following tools are necessary: SMA (with period settings of 50 - yellow, 25 - red) and RSI.
To open a long position, the following situation should occur: the value should cross the SMA, showing growth; the red line of the slider should cross the yellow line, also showing growth; the RSI, crossing the 50, shows growth. For the short position: the value must cross the SMA, showing fall; the red sliding line must cross the yellow sliding line, showing fall; RSI must cross above 50, also showing fall.
How to Add SMA to MetaTrader 4?
MT4 contains a set of basic tools for analyzing the dynamics of an asset and the SMA is also part of the basic tools here. Adding it to the terminal is very simple. To do this you need to find it among the trending tools of the platform by going to the following path in the main menu: Insert --> Indicators → Trend → Moving Average:
Selecting here Moving Average and clicking on it, you should go to its settings to select a specific type of MA, SMA, and specify the necessary period to work:
Then, after clicking on the "OK" button, you can add the instrument to the chart and start working with it. Now the working space of the platform looks like this:
Now you know how to use Moving Average. You have learned in detail about the Moving Average indicator, its practical use, strategies based on this indicator, and how to tune it. You will be able to trade practically any financial instrument efficiently. The indicator is suitable for working on any stock exchange, including forex, and gives a clear idea of the market trends. Several strategies are based on the indicator, each of which can bring good returns.
The Moving Average Indicator itself is quite informative, but coupled with other methods of technical analysis (for example, candlestick analysis) allows for more impressive results. When working with any indicators, a trader should always not blindly trust the signals, but analyze the situation on the market independently to avoid an excess of false signals. A good understanding of how to tune Moving Average allows us to reduce the number of false signals, but not get rid of them altogether. As it is easy to guess from the description of the Moving Average indicator, it is a simple "beacon", but not a magic assistant, which prompts when to buy and when to sell to gain maximum profit.
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