How to Create a Simple Moving Average (SMA) Strategy in Forex

How to Create a Simple Moving Average (SMA) Strategy in Forex 

Investing in the forex market can be a lucrative way to make money, however, traders may hit periods of low profits or even losses. To maximize your earnings and reduce your risks, consider creating a simple moving average (SMA) strategy to help you understand when is the best time to enter or exit the markets.
forex simple moving average strategy

    What is simple moving average (SMA)

    Moving averages are one of the core indicators in technical analysis, and there are a variety of different versions.
    SMA is the easiest moving average to construct. It is simply the average price over the specified period.
    The average is called "moving" because it is plotted on the chart bar by bar, forming a line that moves along the chart as the average value changes.

    How this indicator works

  • SMAs are often used to determine trend direction. If the SMA is moving up, the trend is up. If the SMA is moving down, the trend is down. A 200-bar SMA is common proxy for the long term trend. 50-bar SMAs are typically used to gauge the intermediate trend. Shorter period SMAs can be used to determine shorter term trends. 
  • SMAs are commonly used to smooth price data and technical indicators. The longer the period of the SMA, the smoother the result, but the more lag that is introduced between the SMA and the source. 
  • Price crossing SMA is often used to trigger trading signals. When prices cross above the SMA, you might want to go long or cover short; when they cross below the SMA, you might want to go short or exit long. 
  • SMA Crossing SMA is another common trading signal. When a short period SMA crosses above a long period SMA, you may want to go long. You may want to go short when the short-term SMA crosses back below the long-term SMA. 
 Calculation SMA is simply the mean, or average, of the stock price values over the specified period.

Understand the Concept of Moving Averages 

Moving averages are technical indicators used to show the average price of a security over a given amount of time. They are calculated by taking the sum of all historical prices within that period and then dividing it by the total number of prices in that period. Using this strategy, you can monitor changes in short-term trend direction over a longer-term trend and recognize important support and resistance levels during certain periods. 

Establish Your Trading Rules 

Before you begin to utilize the SMA strategy, it's essential that you define your entry and exit rules. You must also consider your risk factors, position sizing and trading intervals. Your entry point should be based on whether a price trend is expected to rise or fall. A buy entry occurs when the current price is above its average, while a sell entry should be when the current price is below its average. Once you set your rules, they should remain consistent across all trades. 

Set Up Your BUY and SELL Triggers 

The first step to setting up your SMA strategy is to assign and set your BUY and SELL triggers. 
  • A BUY trigger is established when the current price is greater than the SMA line you’re tracking, while 
  • a SELL trigger occurs when the current price falls below the SMA line you’re monitoring. 
Once these triggers are in place, you can begin trading with confidence that you have established an effective entry and exit strategy for the market. 
 

Backtest Your Strategy 

Once you have established the correct settings and your BUY and SELL triggers, it’s important to backtest your strategy before putting it into use in the market. This will give you an idea of how successful it has been in the past, so you can make a more informed decision about whether or not to use it. By backtesting, you’ll also be able to adjust and fine-tune your settings for the best possible performance 

Keep Track of Performance and Make Adjustments 

After backtesting, it’s important to keep track of the performance of your SMA strategy. This will allow you to identify areas that need improvement or opportunities where the strategy could be tweaked for optimal results. Pay close attention to changes in market conditions and adjust your settings as needed. Also, make sure that you are monitoring the results of each trade so that you can react quickly if they don’t turn out as expected.
With regular monitoring and adjustments, you can ensure that your SMA strategy is a profitable and successful one

 

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