Simple Moving Average Or SMA Forex Indicator explained for you, Simple Moving Average, the meaning of this term is as simple as it sounds. SMA is the abbreviated form of Simple Moving Average. In simple words, it is calculated by taking the closing prices of any currency of the last “X” periods and adding all the values and then dividing the result by “X”. “X” is the number of periods and can be variable. Forex traders can set the value of X according to their requirements. The result that you get after dividing by “X” is the Simple Moving Average. For example, if the value of “X” is 15 days that means you are taking the period of 15 days to calculate the SMA then add the closing prices of the last 15 days and then divide the result by 15 and you will get your SMA. Drawing the SMA lines with software like Metatrader is very easy.
How to use Simple Moving Average or SMA lines
Open a chart for any currency pair. Click on the Insert menu, click on the Indicator, click on the Trend and then click on the Moving Average.
Insert àIndicators àTrend àMoving Average
See the picture below to understand better.
After clicking on the Moving Average as shown in the picture above, you will get a window of moving average. In that window you can set input period, Moving Average method, Apply to, style and color. In the Moving Average method field, select Simple as shown in the picture below and your Simple Moving Average line will be drawn on the chart.
As like all other indicators, SMA is only a forecast of the future prices and not the known result of the future so the Forex traders and investors should not only depend on this indicator for placing their trades. Forex traders will get better results if they combine SMA with other indicator for better prediction. Now let’s understand the concept with a figure. See in the example below of how to forecast future price of any currency.
In the figure above, three periods are taken that are of 15 days, 30 days and 60 days. The first red colored line shows 60 days period, second blue colored line shows 30 days period and the last top green colored line shows 15 days period. The value of lower period SMA will be closer to the current price and the value of higher period SMA will be less closer to the current price because in higher period SMA, those price will also be counted that are farthest from the current price of the currency. So the greater the period you will use, the slower will be its reaction towards the price movement and the lesser the period you will use, the more will be its reaction towards the price movement.
Traders and investors should concentrate on those points where the averages cut each other and try to derive some conclusion from the price behavior of the currency. The crossover points are important because these represents the change of sentiments as we proceed from either rising prices of a currency to the falling prices of the same currency or falling prices of a currency to the rising prices of the same currency. Watch such averages carefully and you will see that most of the times price of currency returns to its original path or difference between the simple moving average of long term period and the short term period becomes either zero or minimum. For example, look at the figure below where point A is the first crossover, B is the second crossover and C is the third crossover where the difference between the two or three simple moving averages reduces to minimum or zero.
Simple Moving Average is better to use with long term period to display a smooth chart and eliminate the possibility of losses. You can read more about learn Forex trading in our FX school.