SMA - how this indicator works, how to use it in trading.
Moving averages are considered one of the main indicators in the framework of technical analysis. There are several types of moving averages. SMA is the simplest moving average. It displays the average price for the specified time period. The average value is called "sliding", since it is displayed on the chart column by column, forming a line that moves along the chart when the average value changes.
The following formula is used to calculate the SMA value:
SMA = (sum of price values for N periods) / N
SMA smooths and greatly simplifies the analysis of the price trend. If you see that the SMA points upwards, then this indicates an increase in the price. If the line "goes down", then the price, accordingly, decreases. At the same time, you can observe the following relationship: the longer the time frame for the SMA, the smoother the moving average itself. The short-term SMA is considered more volatile, but at the same time its indicators will be closer to the initial data and information.
Using SMASMA is an important indicator of trend trading, which is used in several ways.
One of the most relevant ways is to determine the input or output signals using a cross-strategy.
One of the strategies that traders are looking for is SMA for “crossing”. An intersection occurs when a line "passes" through another. This strategy can help you determine when to enter and exit a trade.
If you see that the SMA intersect with each other, it may indicate that the trend will change soon, which will give you the opportunity to get the most successful entry. When the short-term simple moving average returns below the long-term SMA, you may want to open a short position. You may want to open a long position when a short-period SMA crosses a long-period SMA.
You can use simple moving Averages (SMA) to plot a long-term trajectory, ignoring the noise of daily price movements. This allows you to compare medium-term and long-term trends over a wider time horizon. For example, if a currency's 200-day SMA falls below its 50-day SMA, this is usually interpreted as a bearish death cross and a signal of further decline. The opposite pattern, the golden cross, indicates the growth potential of the market.
The SMA crossing strategy is another technical strategy used to enter and close trades. The strategy is executed by constructing two SMA lines based on two different time frames. Looking at when the lines intersect, it helps some traders to time their trades. The most popular moving averages for long-term investors are the 50-day and 200-day SMA. For short-term investors, 10-day and 20-day SMAS are also often used.
Trend Direction Detection: SMAS are also often used to determine the trend direction. If the SMA moves up, the trend goes up. If the SMA moves down, the trend is downward. SMA with a shorter period can be used to determine short-term trends.
Point support or Resistance areas: SMAS offer a smoothed line that is less prone to false signals in response to small temporary price fluctuations back and forth. Thus, it provides dynamic support and resistance areas for trending price actions, where in such areas the potential set at entry levels can be determined.
