What are Moving Averages and How to Use Them to Trade Successfully – Part 2 SMA

Simple Moving Average (SMA) Explained

The simple moving average is like the name describes: A simple calculation of the moving average of a market
over a given period of time as defined by the trader. Let’s break this down a little to help make it more digestible.

When you view any given market, you are looking at the overall chart of movement in the price for that market over whichever period of time you have selected. It could be minutes, hours, days, or even weeks. It all depends on your time frame and trading strategy. Regardless, you can use the simple moving average no matter which time frame you are using, and you can set the simple moving average itself over a set period of time to determine what the average price is for those currencies over so many candlesticks.

Let’s break this down in an example:

1. You use the 1-hour chart to examine the EUR/ USD
2. You pull up the simple moving average indicator
3. You set the SMA indicator to review fifty candlesticks worth of time
4. The SMA indicator will show you what the average price was for the EUR/USD over the last 50 hours

You can tweak this indicator any way that you want to get it to show different statistics that might be of interest to you.

You can choose to narrow the window (down to say ten candlesticks) or widen it. The longer the time period worth of data, the more the average will smooth out for you.

It is recommended that you use a time frame that is at least long enough to capture a strong sampling of data, but probably not so long that it becomes almost meaningless itself. It is challenging to strike that perfect balance to be sure, but you can find the right way to juggle it all when you start getting in there and messing around with it.

The important thing to remember about the SMA indicator is that it just shows a simple average of the time periods that are contained within the parameters that you set for it.

This means that you don’t necessarily get to see everything that is going on in the movement of that market. It is simply smoothing out some numbers for you, so you have a basic sense of what is happening, but not much more than that.

It can be an important starting point for doing some research about a market that you care about, but you shouldn’t assume that the SMA indicator is all that you will need to make informed trading decisions. You really need to work out a lot more information than that by using other indicators when possible.