Simple Moving Average: one of the best indicators?
Simple moving average is probably one the most used forex trading indicators. It help traders to determine the market trend. By watching the 200 SMA or 50SMA you can see what the trend is for the day, a week or even longer. This article will describe in detail how to use this popular forex indicator and how it helps you to become a profitable forex trader.
I will describe the following topics;
- Definition of Simple Moving Average
- How to add the SMA indicator to your chart
- Limitations of the SMA
- 5 tips how to use this indicator
Definition of the Simple Moving Average
SMA is the easiest moving average to use. It shows the average price over a specified period. It is called “moving” because it is plotted on the chart bar by bar, which forms a line on each chart whenever the average price changes.
The Formula For SMA Is: SMA=A1+A2+...+An / n
An=the price of an asset at period
n=the number of total periods
but hey, enough about the math..
Basically the SMA is a technical trading indicator to determine if a price is likely to go bullish or bearish and to find entry points when trends are reversing. A 14-day moving average would average all closing prices for the first 14 days as the first data point. The next data point would drop the earliest price, add the price on day 15 and calculate the average price.
Do not confuse the SMA with the EMA (Exponential Moving Average). The EMA weighs the current price more than previous prices where the SMA assigns equal weighting to all values.
How to add a SMA to a chart?
After opening your MT4 terminal you can find the “+” button in the top menu and there you select the trend indicator “simple moving average”.
After selecting the SMA indicator a settings field pops up. Here it is important to select the correct period as well as to use the simple version based on the closing price.
Limitations Of The SMA
The most common limitation of the SMA indicator is that fact that this indicator relies heavily on outdated data. For example, a price move on the 23rd day will have a similar impact as a move on the 190th day. Many economists stated that is more useful to factor in more recent price data, since using historically data will not predict anything for the future. Therefore there is a constant discussion about whether to use the SMA or the EMA. Personally I prefer the SMA if used correctly.
5 tips to use the SMA indicator
- one of the most used crossover entries is when the 50SMA crosses the 200SMA
- use multiple SMA periods, for example 20 – 50 – 100 -200 and give them different color
- H1, H4 or Day charts are the best time frames to use
- to determine a good entry, try to study the charts starting from D1 and work your way down to M15
- this indicator is perfect to create your automated trading strategy
In the chart above you see what many traders do whilst using the SMA indicator. Each time a shorter period crosses a longer period it enters a market position.
As most indicators, each new trader should practice with the most common technical analyzing tools. Since the SMA is mostly used by trend traders it is absolutely not a waste of time to get familiarized with this indicator. Maybe you want to use it for finding entries or exits and maybe you prefer to use it for a scalping strategy. Many customized mt4 indicators also use the SMA indicator so it is a fact that this is a good and well acknowledged trading tool.
You might want to see more mt4 indicators.