Every trader at the beginning of his adventure with technical analysis wonders how to use SMA indicator. The Simple Moving Average (SMA) is a moving average indicator that's calculated by adding the recent closing prices and dividing the result by the number of time periods covered by these prices. This indicator is used to determine whether the price will continue moving in the current trend or reverse.
This guide will teach you how to set up the SMA on IQ Option and use it to trade.
How to use SMA indicator on IQ Option
The SMA indicator can be used in all charts offered by IQ Option. However, I recommend using this indicator on the Japanese Candles chart. The reason for this is that the candles chart is easy to read especially when used with the SMA.
Start by setting up the Japanese candles chart on your IQ Option trading account. Click on the charts feature on your trading interface and then select candles.
Next, click on the indicators feature on your trading interface. Select Moving Averages and finally click the Moving Average option.
On the moving average window, select SMA as type and set SMA indicator settings, specifically the period to 10.
Your Japanese candles chart should have 1-minute interval candles. This makes it easy to analyze the price and SMA movements and enter trades lasting 1 minute or more.
What does the SMA line tell you?
The SMA is the average of the closing prices over n periods. Suppose we have an SMA3, or 3-period average.
The last 3 candles had the following closing prices: 3, 4, 5.
So the average equals: (3+4+5) / 3 = 12 / 3 = 4
Another candle appears and the closing price is 2.
The next point on our average line is: (4+5+2) / 3 = 11 / 3 = 3.66
And so the platform at the close of each candle counts the average of the last 3 candles. These points are combined into a line which is overlaid on the price chart.
This average shows us the market trend over the average period. As the indicator itself is calculated from past prices it belongs to the group of lagging indicators. The longer the average period, the later it reacts to current price changes.
What is the difference between simple and Exponential Moving Average?
EMA or Exponential Moving Average is the second most popular moving average among traders. The formula for calculating it is different and on a chart, it will take a slightly different course than the SMA. The EMA is considered to run a little closer to the price, as more weight is given to the nearest current prices when calculating the average.
The best part is that if you know how to use SMA indicator you also know how to use the EMA. The principles are identical.
Simple Moving Average trading strategy with SMA10 on IQ Option
How do you enter trades using the SMA10 indicator on IQ Option? Let's use the chart above to determine your trade entries.
If the SMA10 cuts the price from above and starts moving below it, you should enter a buy position. Note that the SMA10 must cut the prices on a bullish candle signalling an uptrend. Since the chart has 1-minute interval candles, your buy position should last anywhere between 2 and 5 minutes. Your trade entry should be at the close of the bullish candle that the SMA10 cuts through.
If the SMA10 cuts the price from below and starts moving above it, you should enter a sell position. The SMA should cut through a bearish candle. The close of this bearish candle should be your trade entry point and you should hold your position for 2 or more minutes.
Tips for using SMA for trading
SMA might help you to identify potential trend reversal points on your chart. However, this indicator experiences a lag. It's therefore not very accurate at predicting any future price movements. Fortunately, you can use it alongside other technical indicators such as the Parabolic SAR and the RSI.
Set the SMA period depending on your trading preferences. For example, if you prefer entering short positions (not lasting over 10 minutes) your SMA period should be 10. For longer positions, increase the period value appropriately. However, the higher the period value, the larger the lag experienced.
SMA works very well in volatile markets. So if you anticipate that a news item is likely to affect your trading instrument, set up the SMA and use it to trade trend reversals.
Now you should know how to use SMA indicator. As you've seen, the SMA is simple to set up and use on the IQ Option platform. Try it out today on your practice account. We'd love to hear your views about this indicator in the comments section below.
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