Tutorial Forex

We indicate that the simple moving average is line formed by calculating the average of a set number of period points. For instance, to calculate the SMA period of 10 points on the daily charts, we take the closing prices of each of those 10 day along with divide them by 10. A point on the financial instrument chart is formed.

The last data point is removed on the 11th day to accommodate new data. This process takes place repeatedly. Because the SMA gives equal weight to all the data points in a series, it is regarded as the best trend indicator for long term trend identification. It is commonly utilized for that purpose in forex trading strategy.

Depending on the number of data points used, the simple moving average removes volatility by smooths out the price to help identify long term and short term trends. Similar to all moving averages, the simple moving is a lagging indicator. Price movement is needed before reaction is made. When the markets are side trending, all moving averages tend to perform badly. Consequently, most traders stay away from implementing the SMA during periods when prices are very choppy.

Cross over systems are regularly implemented with simple moving averages. In a cross over system, two SMA of different period points are used. These two lines represent the long term and short term trends respectively. If the long term SMA is trending upwards (Bullish), traders generally enter a long trade when the short term line crosses over it.

Bearish signals are the complete opposite. One should never rely totally on just the simple moving average. They are utilized to confirm trends plus price movement when utilized with other indicators.

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