The Simple Moving Average is an indicator that
calculates the future price movement of the past.
Equation
Is the indicator based on a 10 period timeframe is the
future price calculated from the past 10 prices. The equation is
(Price 1 + price 2 + price 3 + price 4 + price 5 +
price 6 + price 7 + price 8 + price 9 + price 10) / 10 time period = Future price
Time
period
The equation is simple which makes the simple moving
average best in a trend-following market. The timeframe has also an impact on
the calculated price; the longer the time period is the slower is the simple moving
average to react on trend changes in the market.
Purpose
The simple moving average purpose is to find the trend
changes in the market. The indicator is an indicator that should not stand
alone in the decision to enter a trade.
The Simple
Moving Average illustrated in a graph
In the graph is the simple moving average illustrated;
the graph illustrates a blue line, red line and a green line; the blue line is the
simple moving average based on a time period of 10; the red one is based on a time
period of 20 and the green one is based
on a time period of 50.
The green line responds later than the red and blue
line.
The second indicator is the stochastic. The purpose is
to verify the simple moving average.
When to
enter a trade?
The green, red and blue line gives different
indications on when to enter a trade as they are based on different time
periods.
When the simple moving average is above the price line
is the price bearish and bullish when the price line is below the price line.
The stochastic gave an indication at the time where
the simple moving average crosses the price bar; around 7 o’clock the 10-10.
The stochastic is also in a downtrend which indicates that the price is
increasing as the price is moving away from the overbought zone. The indication is at the tops at the
stochastic; they are getting lower and lower.
Try the
simple moving average
Which time period is best when a trader use the simple
moving average is individualized; the trader have to try different time periods
or place the simple moving average with different time periods at the same time
as illustrated in the graph.
Where to
trade with the simple moving average?
The CFD trading platform PLUS500 offers the traders the
simple moving average as an indicator. The list of indicators is a the f(x) button on the trading platform.
Watch the review of PLUS500 or download the trading
platform from their website from this link.
Please notice
that your capital may be at risk trading CFD.
