In Forex technical analysis, the SMA plays a very important role. So What is sma line and what does it mean? How to apply the SMA moving average in trading? If traders are still wondering about the above issue, don’t skip the following article. Let’s consult Forex Trading now.
Overview What is an SMA line?
SMA Road is a technical indicator and is divided into many different types of moving averages. To make transactions easily and conveniently, traders often use this type of line.
What is the SMA line?
SMA line is abbreviated from Simple Moving Average, which means “simple moving average”. This is a line calculated by averaging the market’s closing prices over a fixed time frame. The SMA line can be considered the most basic tool when doing technical analysis in Forex, but it brings efficiency in trading.
An illustrative example for an SMA line: SMA 10 is the average line calculated by closing prices of the last 10 trading sessions.
Types of SMA moving averages
SMA lines include many different types of lines. Among them, the most popular routes include:
- Short-term moving averages: SMA 10, SMA 14 and SMA 20.
- Medium-term moving average: SMA 50.
- Long-term moving averages: SMA 100 and SMA 200.
See more: Average line What is Forex that cannot be ignored?
What is the meaning of the SMA line?
Using the SMA line when doing technical analysis in Forex helps traders make predictions about the market’s price trend, as well as conduct short-term trades to bring profits. By monitoring and analyzing price fluctuations through the SMA, you can make the right trading decisions and limit risks.
Besides, this moving average also acts as a resistance and support line. Whether support or resistance levels are strong or not depends on the size of the SMA moving average. Mid-term (SMA 50) and long-term (SMA 100, SMA 200) lines are highly reliable. Short-term SMA lines such as SMA 10, and SMA 20 are very suitable for short-term trading.
However, you also need to note that the SMA line often has lower sensitivity than other indicators. This will lead to delays in transactions
Formula to calculate SMA moving average in Forex
To calculate the SMA of the most recent trading sessions, apply the formula:
SMA = (G1 + G2 + G3 + … + Gn)/n
In there:
- SMA: Moving average line to be calculated.
- G: The closing price of trading sessions in a specific period of time.
- 1, 2, 3,…n: Sequence numbers of the most recent trading sessions.
How to distinguish between SMA and EMA in technical analysis
Besides the SMA line, the 3 EMA strategy is also applied by many investors in trading. So what is the difference between SMA and EMA?
Although both are moving averages in technical analysis, SMA is calculated by the average of the market’s closing prices at the most recent trading sessions. Meanwhile, EMA (short for Exponential Moving Average) is an exponential moving average and is calculated by the exponential formula.
The SMA line has lower sensitivity than other indicators, suitable for trading in a less volatile market context. On the other hand, the EMA line is often quite sensitive to price fluctuations and gives signals faster than the SMA line. Thanks to that, traders can enter orders promptly.
In Forex trading, investors can combine 3 EMA moving averages (also known as the 3 EMA strategy): EMA 10, EMA 30, and EMA 50. This strategy helps traders observe both short-term and long-term trends. long-term in the market. From there, know what is a good signal to proceed with the transaction.
Instructions for applying the SMA line in Forex
Below is how to apply the SMA moving average in trading that traders can refer to and follow.
Identify increasing/decreasing price trends
The SMA line is used to monitor and identify price trends in the trading market. In case the market price is trending up, the SMA moving average will go up. On the contrary, if the market price tends to decrease, the SMA line will go down.
After determining the price trend, you need to make a trading decision. You can buy when you see the price trending up or sell when you see a downtrend. This helps traders increase profits.
Besides, note the 2 intersecting points on the SMA lines, including:
- Golden Cross: Crossover point when the short-term SMA line cuts the long-term SMA line from bottom to top. This is a sign of the market’s uptrend.
- Death Cross: Crossover point when the short-term SMA line cuts the long-term SMA line from top to bottom. This is a sign of the market’s downtrend.
Determine the support level through the moving average
Using the SMA line can help investors know the support level (or Support) in a transaction. This level is determined when the closing price moves up from below the SMA moving average. At this time, the SMA line plays a role in preventing asset prices from falling further.
You should note that if the price closes close to the SMA line, this is a potential support level. In case the market price falls to the SMA and continues to rise, this is a very positive sign.
Technical analysis in Forex and finding resistance levels
Resistance is understood as the level that prevents the asset price from increasing further. This level is determined when the market’s closing price moves downward from the SMA line. At this time, moving averages work to prevent asset prices from rising.
If the closing price closely follows or is close to the SMA line from above, this is considered a potential resistance level. Additionally, if the price rises to the SMA and continues to go down, it is a negative signal for the SMA resistance zone.
See more: Exness – Trade With The World’s Leading Broker Exness
How to recognize trading signals via an SMA line?
If you still don’t know how to recognize trading signals via the SMA line, you can refer to the information below from Forex Trading to learn details.
Determine the buy signal through the SMA line
The asset buy signal is determined through the SMA line when the short-term average line exceeds the long-term average line.
- The price line exceeds the SMA 20 average line: A sign of a short-term uptrend.
- The price line surpasses the SMA 50: A sign of a medium-term uptrend.
- SMA 20 surpasses SMA 50: A sign of a long-term uptrend.
- In case you see that the price line exceeds the SMA 20 line, and at the same time the SMA 20 line also exceeds the SMA 50 line, this shows an upward price trend.
Identify sell signals through moving averages
How to identify sell signals as follows:
- The price line crosses down to SMA 20: A sign of a short-term downtrend.
- The price line crosses below the SMA 50 moving average: A sign of a medium-term downtrend.
- The price line crosses below the SMA 100: A sign of a medium-term downtrend
- SMA 20 crosses down to SMA 50: A sign of a long-term downtrend.
- The price line crossed down to the SMA 20 line and at the same time the SMA 20 line crossed down to the SMA 50 line: A sign of a downtrend.
Conclude
The SMA is an important technical indicator that traders should not ignore. Hopefully, this article has helped readers answer what is SMA line, as well as gain more useful information about the trading market. Visit Forex Trading now so you don’t miss out on interesting and new knowledge.
FAQs
Below are some frequently asked questions when traders apply moving averages in technical analysis.
Should I use SMA or EMA for effective trading?
This depends on the assets you hold and the trading market. If you are investing in large-cap assets with low market volatility, apply the SMA moving average. If trading in a market with large fluctuations, consider the EMA.
Is the SMA the strongest support and resistance level?
The answer is no. This is a simple technical indicator. To identify resistance and support levels and make accurate investment decisions, you should combine many technical analysis tools and methods, instead of depending on just a single tool.
Which SMA settings are most applicable?
Although there are many different types of moving averages, the most common SMA settings include: SMA 50, a combination of SMA 20 and SMA 100, SMA 200, and combined SMA (SMA 10/20, SMA 50 /200).
