sma indicator
The main problem when analyzing and forecasting any currency pair is the wave-like structure of the market, which has disordered and chaotic movement in the form of various noises.
Actually, the increased amount of noise in the Forex market makes the chart not straightforward, as we can see in various educational textbooks when analyzing certain figures of technical analysis, but chaotic and unpredictable.
Such zigzag market waves do not allow even professionals, let alone novice traders, to see trends clearly.
Therefore, the golden rule of trading only in the direction of the trend is extremely difficult to implement in practice and it is almost impossible to apply it without additional trend indicators.
The sma indicator is the most popular trend indicator, which began to be successfully used in the early 1960s and remains relevant to this day. If we decipher sma, we get Simple Moving Average, which simply means a simple moving average.
So, if the market has such an ambiguous structure with a huge amount of market noise, then in order to look at the market from a different angle we will need to simply smooth out these noises or, as the developers did, derive the average price value for a certain time period.
This leads to an extremely simple formula for constructing the indicator: SMA= Sum of closing prices for a certain number of candles/number of candles. Thus, we have a simple arithmetic average in the form of a line on the chart, which displays the average price value over a certain period.
Sma indicator in the trading terminal
Sma or simple moving average is present in any trading terminal without exception, and even mobile versions of the trading platform
support this indicator.
To add Sma to the chart in the MT4 or MT5 trading terminal, in the top toolbar, click on “Insert”, “ Indicators ”, “Trend” and find Moving Average in the list.
As a result, an indicator line will appear on the chart:
Application of the SMA indicator in practice
As we have already said, SMA is a trend indicator , the main task of which is to determine the trend.
When plotting this line on a chart, the first thing a trader should pay attention to is the slope of the moving average. So, if the line is directed upward, a bullish trend has formed in the market, and if it is directed downward, a bearish trend has formed. Next, special attention should be paid to the location of the price relative to the moving average, since the line can act as support in an upward market or as resistance in a downward one and vice versa.
So, if the price is under the moving average and touched it, but did not break through, we enter a sell position.
If the price is above the moving average and touches the moving average, but does not break through it, we enter a buy position. See an example below: Also, the SMA can be broken by the price and give a signal for a market reversal .
So, if the price breaks the line from bottom to top and is fixed behind the SMA after the candle closes, we enter a buy position. If the price breaks through the indicator line from top to bottom and fixes below it, we enter a sell position. See below in more detail:
In addition to the two considered options for signals directly to enter the market, the signal for the intersection of two moving averages is especially popular.
The principle of trading is almost identical to the price crossing a moving average, however, there are two moving averages with a longer and shorter period. A buy signal appears when the slow SMA crosses the fast SMA upward.
A sell signal appears when the fast SMA crosses the slow SMA from top to bottom. For more details, please see the image below:
In conclusion, I would like to note that, like any trend indicator, the SMA gives a signal with a slight delay, and the more you smooth the price (increase the period), the degree of delay will increase.