Simple Moving Average - The SMA Indicator

Forex Indicators

• Bollinger Bands
• Fibonacci Retracement
• MACD
• Moving Average
• Exponential Moving Average
• Simple Moving Average
• RSI (Relative Strength Index)
• Stochastic

In our Moving Average Forex indicator page, we know that the Simple Moving Average (SMA) is an average of a predetermined number of data points which is then plotted on the chart.

For example, to calculate the SMA period of 10 points on the daily charts, we take the closing prices of each of those 10 day and divide them by 10. This gives us a point on the chart.

On the 11th day, we remove the first day from the data set while adding the new data point and dividing the new value by 10. This is done over and over again.

Because the SMA gives equal weight to all the data points in a series, it is seen as the ideal trend indicator for long term trend identification.

As such, many traders implement the SMA into their forex trading strategy.

Simple moving averages help smoothen out volatility in prices and helps the trader identify the short term or long term trend depending on the period that was used on the charts. Like all moving averages, the simple moving is a lagging indicator. It always reacts behind the movement of price.

Generally, all moving averages do rather poorly when the markets are ranging. Therefore, most traders avoid implementing the SMA during periods when prices are very choppy.

Some basic strategies used with the simple moving average include cross overs.

Generally, two SMA's with different periods are entered into the charts. They are made up of a long term signal and a short term signal.

Should the long term signal remain bullish, enter a long trade when the short term signal crosses above the long term signal.

The reverse is done with bearish signals. Most importantly, simple moving averages are never used alone.

They are used in conjunction with other forex indicators and are usually used to confirm a decision along with those other indicators.