INDICATORS. Moving average. Simple moving average (SMA)

8 Nov

Amongst the most widely used moving averages is the SMA. It is formed by computing the average price of a currency over a specific number of periods. An SMA drops old data as new data is received allowing the average to move along the time scale.

How to use.

Moving averages are commonly used to identify trends and reversals as well as identifying support and resistance levels. Moving averages such as WMA and EMA, which are more sensitive to recent prices (experience less lag with price) will turn before an SMA. They are therefore more suitable for dynamic trades, which are reactive to short term price movements. Moving averages such as the SMA move more slowly providing valuable information on the long dominant trend. They can however be prone to giving late signals causing the trader to miss significant parts of the price movement.

How to trade signals.

Moving Average Crossing over: Moving average crossing over is a term applied when more than one moving average is used to generate a trade signal where traders will act when the shorter term moving average crosses the longer term moving average. A bullish crossover occurs when the shorter term moving average crosses above the longer term moving average . A bearish crossover occurs where the shorter term moving average crosses below the longer term moving average.

Support and Resistance: Moving averages can also act as a support level in an uptrend and resistance levels in a downtrend. If the average is widely followed orders in favour of the trend often cluster around the average. As markets are often driven by emotion and many players trade counter to the trend expect overshoots, to this extent the average should be used to identify support and resistance zones rather than exact levels.

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