Simple Moving Average Strategy How to Use SMA in Forex

Ensure you do detailed fundamental analysis and technical analysis on the currencies and that you understand how both move in relation to each other. Find out all you need to know about how to trade FX using moving averages, learn more about SMAs vs EMAs, and check out the five most popular MA indicator FX strategies to try. It is the average of closing prices over specified trading sessions. For instance, if you want to calculate the 20-day SMA of the EUR/USD pair, you would add the closing prices of the pair for the last 20 trading days and then divide that sum by 20. When the currency pair’s price is above the SMA line, it indicates an uptrend, and when the price is below the SMA line, it indicates a downtrend. Traders can use this information to enter trades in the direction of the trend, i.e., buy when the trend is up and sell when the trend is down.

• In this article, we will be discussing what SMA is, how it works, its types, and its practical applications in forex trading.
• It is calculated by adding up past data points and then dividing by the total number of data points.
• Another way to use SMAs is by watching for price action around the SMA itself.
• As you can see, the longer the SMA period is, the more it lags behind the price.
• No matter how you use them, simple moving averages are an essential tool for any technical trader.

This action signals that the downtrend or correction is over and a possible uptrend is starting. A bullish crossover can be used as a signal to enter a long trade. However, during choppy or sideways markets, the indicator can be less reliable in measuring market fluctuations. Bullish crossovers are less important when the long-term trend is down.

Step 1: Choose your trading platform

In other words, mastering the simple moving average was not going to make or break me as a trader. It wasn’t all death and gloom along the way, and the simple moving average is just one component of my trading toolkit. This was by far my darkest period of the journey with moving averages.

The SMA indicator is usually imposed over the existing candlestick formations on the chart. However, traders can also add the SMA to another indicator window, such as the RSI, to provide additional trading signals. Traders can quickly assess the prevailing trend of price behaviour from the direction of the SMA. The EMA is very popular in forex trading, so much that it is often the basis of a trading strategy. The two averages are similar because they are interpreted in the same manner and are both commonly used by technical traders to smooth out price fluctuations. MAs also help identify support and resistance levels for stock prices.

The Fastest Way To Earn Money In Olymp Trade: Compound Interest And 1 Minute

In this article, we will be discussing what SMA is, how it works, its types, and its practical applications in forex trading. An SMA indicator has both pros and cons, but is, in fact, highly versatile, which is why it is used by both long and short-term investors. It is also possible to use a strategy where you apply two moving averages to a chart, with one based on a longer period and one on a shorter one. When the shorter-term moving average indicator line crosses above the longer-term moving average indicator line, this is a buy signal, as it suggests the trend is shifting up. The reverse, of course, is when the shorter-term moving average line crosses below the longer-term one. As you would expect, that is a sell signal, suggesting that the trend is shifting down.

Thankfully the second signal produced a massive short trade from 10,500 down to 8,465. The 10-period SMA is the blue line, and the purple is the 20-period. In this example, you would have bought once the red line closed above the blue which would have given you an entry point slightly above $13.80. Whenever you go short, and the stock does little to recover and the volatility dries up, you are usually in a good spot.

They develop original trading strategies and teach traders how to use them intelligently in open webinars, and they consult one-on-one with traders. Education is conducted in all the languages that our traders speak. For example, SMA (50) means the moving average of the 50 candles on the closing price of the previous 50 candlesticks.

Calculating the Simple Moving Average (SMA)

Now, one point to note, I was running these results on one stock at a time. That’s right, my analytical side kicked in, and I needed to review more data. First off, it was tough trying to figure out which stocks to pick.

If you look at moving average crossovers on any symbol, you will notice more false and sideways signals than high return ones. In order to day trade crossover, the first decision you have to make is to select two moving averages that are somehow related to one another. Another simple moving average trading strategy is to go counter to the trend. Look at how the price chart stays cleanly above the 20-period simple moving average.

Set up the simple moving average algorithm

If the price is above the SMA, it indicates an uptrend, and if the price is below the SMA, it indicates a downtrend. One way around this is to use two MA lines, one for a longer time frame and one more short term. This means that your first step is to find the right currency pair to suit your trading style and goals.

We’re also a community of traders that support each other on our daily trading journey. The stock price will break out of the trend after the stock stays above the MA for a long period before breaking out of the trend. What’s slightly confusing is that when the price does break, it will likely penetrate the SMA first. This is because the SMA is slower to react to the price move and if things have been trending higher for a long period of time, the SMA will have a higher value than the EMA. The takeaway here is to use the longer averages to gauge if a stock is in a bullish or bearish trend.

Moving Average Strategies for Forex Trading

With this strategy, you will still look for crossovers, but with your two MA lines rather than the current price and one ma. When the shorter MA comes from below and crosses above the longer MA line, this is considered a golden cross or bullish cross (and it’s time to buy, as in our previous strategy). When the shorter MA comes from above and crosses to below the longer MA, this is a death cross or bearish cross and considered a sign to sell.

Day 6: 1.2250

In this article, we will discuss how to set your sma in forex trading. The simple moving average is a lagging indicator because it is based on past price data. While the SMA is a helpful technical analysis​ tool, it is best used along with other popular indicators such as trendlines and volume analysis. The moving average convergence divergence (MACD) histogram shows the difference between two exponential moving averages (EMA), a 26-period EMA, and a 12-period EMA. Additionally, a nine-period EMA is plotted as an overlay on the histogram. The histogram shows positive or negative readings in relation to a zero line.