The SMA indicator in technical analysis

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Highlights: The method of calculation and interpretation Signals SMA The advantages and disadvantages of using SMA For the market is characterized by two States: the trend is directed upward or downward movement and flat movement in a horizontal channel of prices. Trend is the main way for a trader to earn money. But, unfortunately, the statistics suggests that the trend movement accounts for only about 30 – 35%. The rest of the time price is moving sideways. There are trading strategies mostly flat, but the trend gives more opportunities with predictable risks. Trade with the trend more predictable, so traders using different strategies tend to open trades in direction of the main movement of the market, to go “in step” with the majority and not to get in the way of “fly the engine”. To identify the trend created a set of tools. The most popular of these for many decades is the indicator SMA (Simple Moving Average) a simple moving average. Its scope is quite broad — sliding were applied in different markets and instruments. Forex traders or stock market investors, traders, trading bitcoin or futures on commodities, goods used SMA-indicator to identify the main market trends in the short or long term. The logic behind the use of moving very simple and straightforward. Comparing current market conditions with historical data, can be understood, with a certain probability, to predict the further development of the situation. The method of calculation and interpretation There is a whole “family” Moving Average. They only differ in method of calculation and, consequently, “sensitivity” to price fluctuations. Interpretation of the signals are of identical value. The most popular are the simple moving average — Simple Moving Average (SMA) and exponential moving average – Exponential Moving Average (EMA). SMA is the arithmetic average value of the closing prices of a financial instrument over a given period. The calculation can be laid other options – the opening price, the maximum or minimum prices. Thus, moving a graphic representation of a certain average price. Figure is near signs of the indicator of the selected period. If the option is selected the Close price, the formula for calculating SMA 14 is as follows: The sum of the closing prices for 14 hours (days or any other unit periods) / number of periods (in this case 14). The period is selected depending on the timeframe. Shorter time intervals require more sensitive indicators, SMA 5, SMA 13 and SMA 21. In the long run to identify the basic movement used SMA large periods, the most frequently chosen value 52, 100, or 200. 14 SMA on the hourly EURUSD chart Moving averages are applied to price charts and volume charts and indicators. MA on the chart volume, the S&P 500 futures mini D SMA indicator clearly reflects the dynamics of average price. Comparing the price chart with the indicator line, the trader receives the rendered information about the current market trends. The price is above the SMA — the market has a tendency to rise above the average historical values. The price is below the indicator — obviously, there is a tendency to decrease. SMA is pointing up shows the direction of the uptrend. The angle characterizes the dynamics and the intensity of the trend movement. If the moving went down in the selected period there is a downward trend. This type of indicators it makes sense to use only in the presence of trend. In periods of flat they form a lot of false signals, so their use becomes impractical. It is believed that the main problem of SMA is a signal delay. This is particularly evident in large periods and time frames. In this case, the fast MA on the contrary, give too many false signals. Moving Average is used, alone or in various combinations with other MA indicators. Traders use a combination of moving averages of different periods. This allows you to take a broader look at the market and see what the main trends in the short, medium and long term in one chart. SMA different periods on the chart of the currency pair EURUSD Signals SMA Application of the AGR aimed at identifying the current trend, allows to identify the moment of breaking trends and the emergence of a new trend. The mutual position of the price chart and the indicator line defines the current trend. If the price chart is under the SMA line, it indicates that the market has a downward trend. For a growing trend characterized by the location of price over the moving average line. Trend signals the price crosses the SMA line. In the case when the bar or candle crossed the line of the indicator and closed behind her, a signal is generated to open the trade. This property is a indicator based trading strategy. So, if the candle crosses the mA bottom-up, we can say that the bearish market dominance gives way to bullish and a signal is generated for purchases. The situation when the bar or candle closes below the indicator line, it is possible to consider sales. Signals SMA — the direction of the trend reversal Signals — intersection of the price chart and SMA Crossing the SMA of different periods also indicate a change in the dominant trends. When a fast SMA crosses the slower from the bottom up, it means that in the short term, has changed the mood, buyers predominate, forming a buy signal. Mirror situation — crossing the fast MA from the top down, gives reason to consider sales. Signals — intersection of SMA from different periods In fairness, it should be noted that the signals SMA indicator is not sufficient justification to open a trade and Alexander advises not to focus on them. They reflect the background, the main trend of the market situation allow you to compare the current state with a history of a certain period. Trading from levels, particularly breakout strategies, understanding the main trends gives additional confirmation of the validity of the forecast. More about trade levels it is possible to learn c 5 free lessons Alexander Gerchik Simple moving averages and the other varieties enter into the composition of some indicators such as the MACD, Alligator, Bollinger Bands and many others. SMA can be considered as levels of support or resistance. A price chart that moves away from the moving average, then approaching, then starts and continues to move in the trend. The price behaves near the indicator lines just as near at any level. SMA limits the upward movement — acts as resistance The advantages and disadvantages of using SMA The SMA indicator is a simple technical analysis tool, which has a long history of use. Among the advantages of the indicator are: ease of use; informative – allows you to identify the main trend in the market, identify the trend change. The disadvantages include: a signal delay; use only during a trend. However, the SMA remains one of the most used tools of technical analysis. To learn more about technical analysis and create your trading strategy – sign up for an online Course “trading from A to z in 60 days” from Alexander Gerchik.
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