A simple moving average (SMA) is an indicator used to analyze the market.
Like any other trend-following indicator in Forex, you can use this tool to predict if the price of an asset will rise or fall.
Go to Quotex and add the SMA to any chart, and you will immediately see a line drawn on the charts without any noise.
Below is an example of an SMA line displayed in Quotex charts.
Visually, the SMA is a line that follows the chart to help determine the direction of the price movement.
Other than showing traders direction, the SMA can also be used to spot imminent reversal points and it also acts as a support and resistance zone.
Though SMA is easy to use, it is not the most accurate indicator of the moving average family.
The SMA period is the only configurable parameter found in the SMA indicator.
And what is an SMA period you ask?
In a layman’s language, the SMA period is the period of time you want your SMA to cover while smoothing out the results.
The most common moving average time periods are 50 days and 200 days. However, you can also choose to settle for shorter periods like period 21, period 7, period 14, or 10.
The longer the SMA period the smoother the moving average and the shorter the SMA period the faster the indicator.
How SMA Period Affects Trading Outcome.
Have I already mentioned that longer period SMA’s result in more smoothed SMA lines? Perhaps what I failed to mention is, when you use a longer period SMA, the SMA reacts to quote changes less often hence it gives high-probability signals.
The opposite is true for shorter periods in SMA.
In other words, the number and accuracy of SMA signals depend on the period.
The longer the period, the fewer signals the indicator gives, but they are more accurate. The shorter the period, the more the signals, but they are less accurate.
How to Use The SMA to Generate Signals And Trade in Binary Options
Now that we have covered some basics of the SMA indicator, how about we learn how to use it to trade?
When used correctly, the SMA will help you identify a trend and see where it ends. Of course, the ideal way of using the SMA is to trade in the direction of the trend.
Identifying Trends And Trading With SMA
If you set the SMA on the trading charts and the line faces up, then it means that the price is upwards and that you should be trading UP because the price of the asset you are trading is increasing.
If the SMA goes down, then the trend is downward i.e., the price is falling and you can open Down trades. But that’s just one way to trade the SMA.
The other way is to trade the intersection of the chart and the SMA.
Regardless of the period you choose, if the chart crosses the moving average upward, then this is a signal to open up trade. If the chart crosses the SMA going downward, this is a signal to open a Down trade.
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