SMA-indicator: how to use?
SMA-indicator - one of the simplest and affordablefor trading in all financial markets, including binary options. It is already available on almost all platforms, since at least from time to time all traders use this indicator, even those who have been trading for many years. SMA is an abbreviation of the English name simple moving average, which in translation means "simple moving average".
What is the moving average
The name accurately reflects the method of constructing a smoothline on the graph using the mathematical calculus of the simple arithmetic mean of the price for a certain period. At each time, the sum of the values of the last n candles or bars is taken. For example, if we are on the daily chart, then the total value of the price for the last n days is taken and is divided by the number n, which the trader sets independently in the indicator settings.
In the platform "Metatrader" 4 period SMA-indicatoris practically unlimited, since there the trade is also carried out on the long-term, that is, on large timeframes, where the optimal moving average with a period of 200 or even more. On platforms, however, there is a limitation for binary options. For example, the SMA indicator in Olimp Trade can not be built with a period greater than 60. This restriction does not at all reduce the trading opportunities, since most traders binary options trade short-term and a larger value of n is simply not necessary.
In the SMA indicator settings, there is alsothe opportunity to specify the value of the price at which the indicator will be calculated. This can be the price of opening, closing, the average arithmetic or the average for the candle or bar period. Most often in trading, the closing price is used, because it is of particular importance when making trading decisions.
History of occurrence
The SMA indicator first appeared in the 1960sthe last century and became very popular among traders, which certainly put a hand such famous people as James Hurst and Richard Donchian. It is the latter who is credited with authorship back in those days when he worked in investment funds and was fond of trading in the international currency market. By the way, the fascination with trade came to him after reading Jesse Livermore's famous book "Memoirs of the Exchange Speculator." And although the book was written at the beginning of the last century, many successful traders today recommend reading it one of the first.
When Donchian, along with many otherstraders suffered a crushing fiasco in trade during the crisis of 1929, he decided to reconsider his attitude to trade and engaged in the development of a trading system with the help of indicator analysis. And the basis for this system, which was called "following the trend," was just moving averages.
On the same indicator, a well-knownworldwide system of "turtles", which brings a small but stable profit. James Hurst also developed his own trading system based on moving averages. It is described in his work entitled "Magic profitability in market-timing in the stock markets."
What the SMA indicator gives
The main purpose of the moving average -visualization of the current trend in the market. It would seem that the trend can be seen without any lines - the price goes either up or down, respectively, the trend is up or down. But not everything is so simple, and SMA allows you to more accurately determine the location of the price at the moment, and also simplifies decision making. The simplest thing that can be taken into account when looking at the moving average indicator on the chart is the price position relative to the indicator line.
For example, in long-term trading,indicator with a period of 200, and if the price on the weekly chart is higher than SMA200, then it is recommended to look for an entry into the market for purchase. And vice versa. On the daily chart, it is better to use SMA with a period of 50 to make such decisions. In general, many traders choose the indicator period for different assets and different timeframes. In any case, without testing the strategy to apply it to trading on a real account is not recommended.
What are the strategies for trading on moving averages
There are many SMA-based strategies. But all of them somehow come down to two options:
- trade on the withdrawal from the moving average;
- trading on the moving average.
Each of these options can beDepending on the period, timeframe, etc. For example, the simplest way to trade is to enter the trade when crossing the price line of the indicator on the chart. If the price crosses the line from the bottom up, buy the call option, and vice versa. Crossing is considered to be held if the candle or bar is closed behind the indicator line.
False signals and how to avoid them
However, when trading in moving averagethere will always be a lot of false signals. To filter them, someone uses additional indicators from another group, for example, oscillators. Another option of filtering is to wait until the price not only crosses the indicator line, but also fixes in a new place.
Since the SMA indicator is a trend indicator, itbegins to give false signals during the flight. Float, we determine when the line SMA takes a horizontal or close to it position. Flot is easier to determine when several indicators with different periods are used on one chart. If all lines converge, the price is included in the flat and trading based on SMA indications becomes impossible.
Despite the fact that there are universalstrategies based on removals, you always need to remember a simple rule. The more precisely the adjustment of the SMA indicator for a certain instrument and timeframe is made, the better the results of the trade will be. Here are a few examples of strategies based on SMA for trading on binary options
Trading on rollback
It is often said that the SMA line becomessupport or resistance at different stages of market development. It is this postulate that forms the basis of the trading strategy on pullback. In this case, it is not necessary to understand literally the words "support" or "resistance". In fact, no line is able to influence the behavior of the price, the price is influenced by traders who use the indicators' hints in mass. So, let's see how to use SMA-indicator on the rollback of the price from the line of the moving.
We select the period SMA, equal, for example, 50. A popular 50-period indicator among traders is likely to show good results on many timeframes and tools. We are waiting for the price to come nearer to the moving-house and act depending on how it behaves. If the candle has not broken the line, but closed on the same side, then we look, what will be the next candle. It must close in the opposite direction. This is very likely to mean that the price has strayed from the removals and went in the opposite direction.
This strategy with 50-period moving showsgood results on the 15-minute timeframe. The deal is concluded after the closing of the rotary candle. The expiration period is 6 candles, that is, one and a half hours. A significant shortcoming of the strategy is rare signals. You can increase their number by trading on several assets simultaneously.
Strategy on two moving averages
Periods can be selected independently forof each asset. But there are indicators SMA for binary options with such periods, which show good results on different instruments. For example, SMA with periods of 5 and 25. Call option is bought when SMA 5 crosses up the SMA 25 line and vice versa. Expiration time is 4-6 candles. We remind you that the strategy must be tested on the demo account before proceeding to real trading.
The lack of strategy is the same as that of the previous one -signals appear infrequently. This shortcoming is deprived of the following strategy based on the SMA indicator for binary options, which requires drawing four removals on the chart.
Strategy based on 4 SMA
We take SMA with periods of 5, 21, 55, 89. We designate them on the chart in different colors. And here there are three types of signals:
- SMA5 crosses SMA21, call or put option depending on the direction of intersection, expiration period 1-2 candles;
- SMA21 crosses SMA55, expiration time of 4-6 candles;
- SMA55 crosses SMA89, expiration time is extended to 24 candles.
For all strategies based on moving averages, it is better to choose volatile assets and trade during the European and the beginning of American sessions.