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Simple Moving Average (SMA)

The simple moving average indicator (“SMA”) is usually taught to beginners of technical analysis early on. It’s a “lagging indicator” that reduces visual volatility. Applying the SMA indicator allows traders to clearly visualize the direction of the price action over a period of time.

Common Moving Average Values

In the free JKonFX MetaTrader 4 (MT4) template and in my daily analysis, I have color coded the templates as follows:

  • 10 – Black (dashed line, 1 pixel thick)
  • 20 – Purple (solid line, 1 pixel thick)
  • 50 – Brown (solid line, 1 pixel thick)
  • 100 – Red (solid line, 3 pixels thick)
  • 200 – Blue (solid line, 3 pixels thick)

It’s important to monitor the most common SMA values, because the more traders who see a pattern emerging, the more likely they will all be looking to make sure the pattern occurs.

Moving Average Formula

The close periods are always used to calculate simple moving averages. To calculate the 10-day simple moving average, take the last 10 closing prices and divide them by number of close prices.

Examples

candle_closes[1..10] / number_of_candles

Recent Candle Closes

4, 5, 6, 5, 6, 7, 5, 6, 7, 8, 9, 9, 8, 7

Most Recent 10 Candle Closes

candle_closes = 6 + 7 + 5 + 6 + 7 + 8 + 9 + 9 + 8 + 7
number_of_candles = 10
candle_closes / number_of_candles
72 / 10 = 7.2

Therefore, for the most recent candle, the 10 day SMA is 7.2. When the next candle has closed, the same calculation is applied, but the oldest candle close is removed from the back of the queue and a new candle close is added to the start.

4, 5, 6, 5, 6, 7, 5, 6, 7, 8, 9, 9, 8, 7, 8
candle_closes = 7 + 5 + 6 + 7 + 8 + 9 + 9 + 8 + 7 + 8
number_of_candles = 10
candle_closes / number_of_candles
74 / 10 = 7.4

The 10 day SMA now contains two values: 7.2, 7.4

The same process repeats over. As you can see a minimum of 20 candle closes are needed to make the SMA, because the first value in the SMA requires the initial 10 candle closes to be valid. The new SMA values create a smooth line that shows the direction of the currency.

The spreadsheet below is a working example of 10-day moving average with all formula calculations. For this example, AUD/CAD Daily price closes were used, based on the 22:00 GMT close. You could use the AVERAGE function, however this example splits the sum and division so it's clear.

Copy or Download Example

Moving Average Trading

Traders should not use the Simple Moving Average indicator on its own, but instead as a tool to help find entry and exit points of a trading opportunity. You may often see multiple SMAs on a single chart, which make it look busier than it actually is.

If the SMAs are crossing over constantly without a clear direction, they become less useful. However, if a trend is occurring and the moving averages converge at a particular point on the Candlestick chart, they can often signal a sign of support or resistance in a trend, or an area that could start consolidating before a major breakout. This is called ‘coiling.’

Moving Averages Consolidate
EUR/GBP showing SMAs converging

Look for Moving Average Convergence & Divergence

200 Daily Moving Average

The 200 moving average is most widely used on the daily chart. It is the largest of the most common lagging values and the market often uses it as an indication of trend and support or resistance when the price action is approaching the line. A clear break of the line will reverse the support and resistance roles.

200 Day Moving Average Example
EUR/GBP showing 200 Day SMA


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Written by Joel & JKonFX Staff