- Simple moving average
A simple moving average (SMA) is the simplest indicator in the moving average group. When calculating the SMA, all price information has the same weight, so the SMA is slightly less accurate than WMA or EMA.
The SMA has one configurable parameter: the period. The longer the period, the smoother the moving average (the SMA reacts to quote changes less often). The shorter the period, the faster the indicator (the SMA reacts to quote changes more often).
The number and accuracy of SMA signals depends on the period. The longer the period, the fewer signals the indicator gives, but they are more accurate. The shorter the period, the more the signals, but they are less accurate.
Traders use a simple moving average to identify a trend and see where it ends. If using the SMA, trading should occur in the direction of the price movement.
If the indicator line goes up, it means that the trend is upward, i.e., the asset price is increasing and you can open Up trades. If the SMA goes down, then the trend is downward i.e., the price is falling and you can open Down trades.
The intersection of the chart and the SMA line gives a signal to open trades. If the chart crosses the moving average going upward, this is a signal to open an Up trade. If the chart crosses the SMA going downward, this is a signal to open a Down trade.