Simple Moving Average Indicator (SMA) Explained

Simple Moving Average Indicator (SMA) Explained
Simple Moving Average Indicator (SMA) Explained

The simple moving average (SMA) is widely used in forex analysis. It is the simplest of all forex analysis moving average methods. The premise of the SMA is comparing the closing price of assets to the period of trade. The total price at the end of a particular trading period is thus divided by the amount of time during that period. Such calculations are essential to the trade since they give traders proper insights that allow them to trade effectively. In order to understand the SMA, it is important to look at the various aspects of the indicator.

How the SMA is calculated

The SMA is calculated by adding up the price over the trading periods and then dividing it by the total time. If the chart has 5 sessions of 10 minutes each, for instance, the SMA would be calculated by adding up the closing prices of the number of sessions and then dividing that by 5. In this case, the total closing price over the 50 minutes would be divided by 5. The great thing about the charting packages that come with trading programs is that the calculations are done automatically. But it is important to know how the program arrives at the results so as to have a proper understanding of your trade.

Understanding the mechanisms of the indicator allows you to make different adjustments and strategies that suit you. The market changes a lot and traders are required to have a variety of strategies in order to succeed. It is also important to note that the calculations are based on the historical events of the market. This means that the results that you get from calculating the SMA are not real-time. Instead, they are simply meant to show the general trend of the market over a trading period that has already elapsed.

A key thing to note when using the SMA is that calculations for longer periods of time are not as accentuated as short-term calculations. The long-term calculations thus take more time to react to price movements. The indicator is therefore great for showing the general broader view of the market and the possible general future trend. Indeed, the SMA is known for its ability to show pairs that are either trending down or up. The SMA is nevertheless susceptible to sudden spikes. False signals are thus common with the indicator.

The significance of the SMA in analysis

The moving average indicator is one of the most used analytical tools in the forex market. This is because of its power when it comes to giving a simple and straightforward view of the market. It has a lot of significance in the forex trading realm for many reasons. Its ability to identify current price trends as well as the possibilities of short-term change is invaluable. The SMA is nevertheless often used as an additional tool when more complex situations are involved. When it is combined with other analytical tools, it can be able to act as the basis of signal tracking in the market.

Popular SMA patterns

Just like other kinds of tools, the SMA can be used in multiple ways. There are a number of trading patterns that traders associate with the SMA. The most popular of all are the death cross and the golden cross. The death cross is basically a 50-day simple moving average the has crossed below the 200-day moving average. It is called the death cross because it is a bearish signal that marks the end of profit-making. The golden cross, on the other hand, is the short-term version. When the short-term indicator rises above the long-term moving average, there are likely to be more gains for traders.

In Summary

The simple moving average is one of the many moving average (MA) indicators in the market. This tool is probably the most popular indicator by every standard. There are other kinds of MA indicators in the market as well, including the exponential moving average (EMA) and linear weighted moving averages. They are not as popular as the SMA though. When used properly, the SMA can be valuable to forex trading as it gives some of the clearest signals. The power of the SMA can also be boosted when it is used alongside other tools.