Let’s set this straight – moving averages don’t and can’t affect price actions. It’s simply a lagging indicator, forming the line plotted based on previously closed candles.
Instead, the moving averages are a trend indicator. It informs the technical analysts about the previous periodic trend and suggests its potential trend based on the average price data over a specified period.
In this lesson, you’ll understand the most basic form of MA – the Simple Moving Average (SMA).
Moving Averages (MA) are lagging indicators that follow factors in asset price data points over a specified period. This trend-following indicator is integral to minimizing, if not eliminating, insignificant price fluctuations.
Simple Moving Averages (SMA) are the simplest type of MA. Considering their respective closing prices, it puts equal weight on all trading days.
SMA is considered less reactive to price changes due to its simplistic approach.
The previous lesson taught you that the moving average is a technical indicator that filters out market noise.
It’s a statistical calculation used to analyze data points by creating a series of averages of different subsets of the full data set.
Moving averages function to smooth out short-term fluctuations and highlight longer-term trends or cycles.
While this doesn’t tell you the market price action, the moving average is effective in factoring out random price fluctuations. It eliminates market noise so that you can draw out a better interpretation of the market movement.
Read more: TradersUnited – Forex Moving Averages Explained
The Simple Moving Average (SMA) is the simplest form of moving average. It finds the average mean of the previous closing prices over a specific period, usually a 10-period chart.
This lagging indicator puts the same weight on all specified closing prices of the assets.
Assume you want to get the 10-day SMA of EUR/USD.
To do so, set your chart in a candlestick view, use a 24-hour (1 day) time frame, and jot down the closing price for each candle.
Once you get all the closing prices, you get the sum of all the closing prices and divide the sum by 10 (total number of periods).
After plotting the SMA into your trading chart, it will form a line (or a band) to represent the prevailing volatility amidst the random fluctuations. SMA signals either of these trends:
Note that the simplicity of simple moving averages makes the indicator not particularly responsive to price changes. For a better indicator in a volatile environment, you can use Exponential Moving Averages (EMA) or Weighted Moving Averages (WMA) instead.
To calculate the SMA, you should use this formula:
SMA = (A1 + A2 + ... + An) / n
Where:
An = the asset price at a particular period (n)
n = the total number of periods
Remember, the number of periods is at your own discretion. It could be 50-day, 100-day, and 200-day.
You can also use short-term periods. However, long-term periods provide a more reliable SMA as they are less susceptible to temporary price fluctuations.
Read more: TradersUnited – Monitor Multiple Time Frames to Trade Forex
Trader James plans to trade the EUR/USD market. Considering the euro-dollar's volatile nature, he decided to understand the ongoing fluctuation through the 15-day SMA.
To do so, he jots down the EUR/USD closing prices from the recent 15 days (three trading weeks).
Here are the gathered closing prices over the previous 15 days:
| Week One | 1.0574, 1.0497, 1.0504, 1.0509, 1.0585 |
| Week Two | 1.0566, 1.0552, 1.0526, 1.0495, 1.0466 |
| Week Three | 1.0498, 1.0510, 1.0490, 1.0351, 1.0381 |
After this, trader James started calculating the 15-day SMA of EUR/USD. He uses the formula below:
SMA = A1 + A2 + ... + A15) / 15
SMA = (1.0574 + 1.0497 + 1.0504 + 1.0509 + 1.0585 + 1.0566 + 1.0552 + 1.0526 + 1.0495 + 1.0466 + 1.0498 + 1.0510 + 1.0490 + 1.0351 + 1.0381) / 15
SMA = 15.7504 / 15
SMA = 1.0500
With this calculation, trader James concluded that the EUR/USD is trading at a simple moving average of 1.0500 for the recent 15-day period.
With its significance in following trends, the simple moving average is among the widely used indicators of the financial markets.
This section walks you through the common applications of SMA to help you better analyze the market and identify its future movement.
Pro Tip: Combine SMA signals with other technical tools like RSI or MACD to confirm trends and avoid false breakouts. This multi-indicator trading approach is more reliable in volatile markets.
At its core, Simple Moving Averages follow the prevailing volatility by factoring in the assets closing prices over a specified period.
Thus, it’s an integral tool to determine the overall direction of a market trend.
Here are the two primary price actions to identify when using SMA:
For example, a 50-day SMA can act as a benchmark for medium-term trends.
If the price crosses above this line and stays there, it often confirms a bullish reversal. Conversely, if the price falls below the 50-day SMA, it might signal the onset of a bearish phase.
SMAs can act as dynamic support or resistance levels, especially in trending markets:
Traders often use longer-period SMAs (e.g., 100-day or 200-day) to identify these levels. For instance, if the price tests a 200-day SMA during an uptrend but fails to break below it, the SMA serves as a strong support level.
Similarly, repeated failures to rise above the SMA in a downtrend confirm its role as resistance.
SMA crossovers are powerful signals that traders use to forecast significant trend shifts:
These crossovers are most effective when combined with other technical indicators or during strong market trends. For example, a golden cross on a stock with high trading volume often strengthens the bullish case.
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