Moving averages. Although seeming so simple, the reality is a little bit more complicated than that. We need to really understand all of the types of thee moving averages in order to proceed further in our lessons.
So, there are really three types of the moving averages.
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Simple Moving average – SMA.
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Parabolic SAR.
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Stochastic Indicator.
Today we are going to stop and focus on the first one – the simple moving average.
SMA is actually one of the easiest and simplest types of the moving average in forex chart analysis.
SMA is actually fairly easy to count. Take for example a trade. You take a 7 period SMA for the 1-hour chart. You need to add all of the closing prices in the last 7 hours and divide them by 7. As a result, you are going to have the SMA for the closing price in the last 7 hours.
Simple enough, isn’t it? All you need is to put this average next to your previous SMA calculation and you are going to be able to the see the dynamic of the price and the full SMA picture for the certain asset.
You can mix and match the number of hours and periods here – fully up to you. Want to know the SMA for the closing price in the last 80 minutes? 8 period simple moving averages and 10-minute chart is all you need. But in reality you do not need to count all of that by yourself. The charts are going to count it all for you.
But note here that the longer the time period you use for your calculations, the longer it will take the chart to react to the movements of the price.
You really need to understand how the machines count all of that just to know how to make all of the adjustments and how to manipulate the chart to your full advantage.
So, where can you use the SMAs? Well, simple moving averages are mostly used in order to see the trend in the market.
The only problem with SMAs is the fact that they are extremely susceptible to spikes in trades. That means that in reality the market might be still, but the SMA can count out a trend that is not really there. That can lead to losses.
So, there are really three types of the moving averages.
- Simple Moving average – SMA.
- Parabolic SAR
- RSI - Relative Strength Index
All and all this little tool is perfect for counting and seeing a trend in the price. But, as I already said it is not alone and we have two more moving averages to cover, so, stay tuned for more of the lessons and tell us, how did SMAs help you in your trades?
