Among the most important instruments that a trader needs to know about, moving averages are at the top of the list. They smooth out the ever-fluctuating movement of the price or at least give a smoother sense of it. To get a clearer and vivid understanding of the condition of the market, traders must train their minds to learn about the different moving averages (MA).
Trading with Simple Moving Averages or SMA
You must have already learnt that Forex has two types of moving average: simple and exponential. Both types have their own way of telling a trader what to expect from the market in the near future. But before trading or using any of them, traders much build a solid foundation of understanding over them. Otherwise, they may entangle themselves in a serious situation.
In this article, simple moving averages or SMAs will be featured. If you want to enhance your knowledge about SMAs, let’s get into it.
What is an SMA?
A simple moving average is the simplest and less complicated kind of moving average. Typically, an SMA is calculated by summing up the previous “X” period’s closing rate and dividing that number by X.
If you think it’s complicated, just read along. It will seem like a more sensible concept in no time.
Calculation of the SMA
Suppose you have plotted a ten period SMA on a one-hour chart and ended with adding up the closing rate for the previous 10 hours. Now, if you divide the number by 10, you will get the mean closing rates over the previous 10 hours. To get a MA, all you have to do is to string all those mean prices together. And remember, those who trade stocks online, use
the moving average extensively. So, lets more about the SMA so that we can also use it like the professional UK traders.
If, by any chance, you plotted ten period SMA on a half an hour chart, it made you add up the closing rates of the three hundred minutes and divide the number by 10. Similarly, if you set yourself for plotting the 10 period SMA on the four-hour graph, you had to collect the means over the previous 2400 minutes. After that, you had to divide that number by 10 to get the MA.
Most of the charting packages will do the calculation for the trader. Every trader should master how to calculate it yourself, just in case. Without learning the process, no one can tweak or edit the indicator to increase their productivity.
When a person knows how an instrument works, it gives them the ability to adjust and devise different methods as the environment of the market changes. Like all other indicators available, MAs provide indications a little later. This delay in signaling makes the MAs come with comparatively more credible indications.
The reason behind this delay is mainly the fact that, with MAs, traders are actually taking the data of past averages, and those traders are only observing the common trail of the past and the typical direction of imminent short-term price movement.
The wider period a trader uses for an SMA, the slower the SMA will react to the price action. If a trader uses an MA, instead of passing his time looking at the present price movement on a price chart, it will give him a broader view of the market. So, he can gauge the common direction of the future price.
With the deployment of SMAs, anyone can tell whether a currency pair is rising or trending downward or just has spreading range. The only problem with an SMA is that it is susceptible to all spikes. When this happens, it gives a trader a false indication. A trader can contemplate that the new currency movement can develop, even if there is not actually any trend happening.