The Simple Moving Average (SMA) is one of the popular and simple indicators you can use on IQ Option. This indicator follows the trend indicating good places to enter into trading positions.
In this guide, you'll learn how to use the SMA20 indicator for trading on the IQ Option platform.
- 1 Setting up the SMA20 indicator
- 2 Is SMA20 a good indicator to trade with?
- 3 Capital management strategy when trading with SMA20 on IQ Option
- 4 Be psychologically prepared when trading SMA20
Setting up the SMA20 indicator
What is SMA20?
SMA20 is a simple moving average with a period of 20. 20 is one of the most popular periods for calculating moving averages. SMA20 is considered a short term average. The period of the average can be written as SMA20, SMA(20), but you will also encounter the notation 20 SMA. All notations mean the same thing. Sometimes, for example, when referring to a 50 period moving average you may encounter the name 50-day moving average strategy. The term days will not fit if the average is plotted on an intraday chart, e.g. a five-minute chart.
How is sma20 calculated?
Let's say the closing price of the next 20 candles (including the last one) is:
12, 15, 13, 19, 12, 13, 12, 11, 13, 15, 12, 13, 12, 11, 13, 15, 11, 13, 15, 12
The average of these 20 values is their sum divided by 20. It is exactly: 13.1
If another candle with a close of 18 arrives, the next moving average value will be calculated taking into account the most recent closing price and ignoring the first one in our list above (12 is dropped).
This is because we always count the average of the last 20 candles. So the new value of the average is 13.4, so the direction of the average is upwards. Of course, we do not have to count anything. The IQ Option platform will count all the average values on each candle and connect them with a line. This line is our simple moving average.
For purposes of this guide, we'll use a 5-minute candle interval Japanese candles chart for the EUR/USD pair.
With your chart set up, click on the indicators feature and select Moving Averages. Next select Moving Average.
Next, on the MA window, enter 20 as the period and let the type remain SMA. The Guide to Trading with the SMA Indicator on IQ Option will teach you the basics of setting up SMA and trading with it. For this strategy, we use the SMA, but if you wish you can in a similar way use the EMA indicator (exponential moving average) also available on the IQ Option platform.
Guidelines for trading using SMA20 indicator
When using the SMA20, your objective is to identify points at which the line cuts the prices along with the trend.
If the SMA20 moves from above the prices and touches or cuts across a bullish candle, it's likely that the trend will continue moving down. The downtrend is further confirmed by a bearish candle developing after the bullish candle and SMA20 remaining above the prices.
Is the SMA20 moves from below the prices and touches or cuts across a bearish candle, it's an indicator that the uptrend is likely to continue. The uptrend is further confirmed by a bullish candle developing after the bearish candle. In addition, the SMA20 continues moving under the prices.
Take a look at the two price charts below.
Example with 3 trade entry points signaled by SMA20
Let's use the chart below.
Trade entry signals when using SMA(20)
One of the advantages of using the SMA(20) indicator is its simplicity. All you need to look at is where it touches or cuts across a candle. Next, you'll need to look at the SMA20 line's position relative to the next candle. Finally, enter your trade position based on this analysis.
Now, your trade entry should be after the second candle fully develops. This way, you're sure about the price direction based on the SMA20 line's position and the candle color. Each trade should last 5 minutes.
Is SMA20 a good indicator to trade with?
Most traders will argue that SMA is not a good indicator to trade with due to the lag it has. However, it's a good technical analysis tool for use when the markets are trending.
Given the examples I've used above, it's easy to see that this indicator is safe to use. As long as you're able to identify the SMA20's movement relative to the prices, you should be able to get consistent results.
Now, the SMA20 doesn't work well when the markets have high volatility. For example, when a news item causes the prices to suddenly change.
What does the SMA line tell you?
The SMA gives us information about the trend. Depending on the set period of the average, we can get an indication of the short or long term trend. The first thing to pay attention to is the slope of the average.
It determines the direction of the trend. The degree of slope tells us the strength of the trend. In addition, the relationship between the average and the price itself is helpful. Candles above the average indicate an upward movement, below a downward movement.
Capital management strategy when trading with SMA20 on IQ Option
As you've seen, the SMA(20) indicator can bring in consistent winning trades. This makes it a good strategy for making relatively high profits from few trades.
As such, I would recommend using compounding as a money management strategy. Start with the usual 2% to 5% of your account balance. Then for subsequent trades, invest your winnings plus that initial investment.
For example, if you have a $100 account balance, your first trade amount would be $2. With a return of 80%, you would make a profit of $1.6. You would therefore invest $3.6 in your subsequent trade regardless of whether your first trade was profitable or not.
This money management strategy ensures that even if you make 3 trades per day, you will end up profitable.
Be psychologically prepared when trading SMA20
Trading using the SMA20 might seem simple at a glance. However, it requires a lot of patience. It might take minutes or even hours before the right signals present themselves. You'll therefore need to patiently analyze the price charts.
If the right conditions present themselves and you miss the opportunity to enter a position, wait until the SMA(20) crosses the price charts again. Trading would result in losses.
Now that you've learned how to trade using the SMA20 indicator on IQ Option, your next step is trying it out. Head over to your IQ Option practice account and practice this strategy. We'd love to hear about your results in the comments section below.
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