Not many indicators get less respect than the diminutive simple moving average (SMA). Though there are a multitude of useful applications for the SMA, most traders opt for more complex indicators in their trading methodology. To my way of thinking, this is a mistake. There are very few charts I use that don't have some variation of the SMA included on them.
In my opinion, simplicity is not in vogue these days. I think this opinion has less to do with functionality than utility. With the advent of highly complex indicators available, most traders tend to opt for complexity over simplicity. I don't have a rational explanation for this trend, nor do I completely understand it. In my trading I have found a multitude of useful applications for this indicator in may often rely heavily upon the information SMA imparts. Further, information from the SMA is easily understood and unambiguous, making it especially easy to interpret.
By nature, I am a trader who seeks to stay trading in the trend. I am also a scalper, so I often use very short time periods in my trading. And using short time periods, I often can only view small portions of the market on my trading chart. As a result of this phenomena, I can often lose track of broader trends that have occurred. Again, it is imperative in my trading to stay in the trend.
To solve this problem, I strike and 89 period SMA through the price action section of my chart. The SMA gives me a solid idea as to where the trend is relative to the current price action. If the price action is significantly below the 89 period SMA, say 8 or 10 points on the ES chart, I know that the current price action is moving against the trend. I can gauge my trading accordingly and concentrate primarily on short trades. On the other hand, if the price action is a similar distance above the 89 period SMA, I can concentrate my trading efforts on long trades. Further, the angle of the 89 period SMA gives me a firm reading on the direction of the overall trend of the market. This information is invaluable in my trading and I always have a firm grasp on the overall trend of the market.
I have another, more complicated use for the SMA. I generally draw two SMA lines right in the actual price action. One SMA line is a 5 period SMA calculated at the close of my three minute bars, the other SMA line is a six period line calculated at the opening of the next three minute bar. The combination of these two SMA's clearly shows, at a micro level, the short-term action occurring in the underlying asset price. These two indicators can be especially effective when considering timing your exits. Though I do not use them as a primary indicators in my exit strategy, they are very helpful in confirming what I do believe as the appropriate time to exit.
Many traders plot two SMA lines and time their trades as the two lines intersect. There are a wide variety of time periods used in implementing this technique. Most people will set one SMA at approximately 200 time periods and the other SMA as much shorter time period. This strategy can be very effective in timing and entries and exits, though I have found better methodologies in my trading to accomplish this purpose. There are however, a multitude of traders who swear by this method and it remains to this day a very popular trading method.
In summary, there are many uses that may be implemented using simple moving averages. I think it is important to not overlook these uses and implement them in useful ways. Because the SMA is a relatively basic calculation, it seems that, in recent years, it has been more or less ignored. In my opinion, that would be a terrible mistake because this indicator has a variety of uses that will greatly enhance your trading effectiveness.
In my opinion, simplicity is not in vogue these days. I think this opinion has less to do with functionality than utility. With the advent of highly complex indicators available, most traders tend to opt for complexity over simplicity. I don't have a rational explanation for this trend, nor do I completely understand it. In my trading I have found a multitude of useful applications for this indicator in may often rely heavily upon the information SMA imparts. Further, information from the SMA is easily understood and unambiguous, making it especially easy to interpret.
By nature, I am a trader who seeks to stay trading in the trend. I am also a scalper, so I often use very short time periods in my trading. And using short time periods, I often can only view small portions of the market on my trading chart. As a result of this phenomena, I can often lose track of broader trends that have occurred. Again, it is imperative in my trading to stay in the trend.
To solve this problem, I strike and 89 period SMA through the price action section of my chart. The SMA gives me a solid idea as to where the trend is relative to the current price action. If the price action is significantly below the 89 period SMA, say 8 or 10 points on the ES chart, I know that the current price action is moving against the trend. I can gauge my trading accordingly and concentrate primarily on short trades. On the other hand, if the price action is a similar distance above the 89 period SMA, I can concentrate my trading efforts on long trades. Further, the angle of the 89 period SMA gives me a firm reading on the direction of the overall trend of the market. This information is invaluable in my trading and I always have a firm grasp on the overall trend of the market.
I have another, more complicated use for the SMA. I generally draw two SMA lines right in the actual price action. One SMA line is a 5 period SMA calculated at the close of my three minute bars, the other SMA line is a six period line calculated at the opening of the next three minute bar. The combination of these two SMA's clearly shows, at a micro level, the short-term action occurring in the underlying asset price. These two indicators can be especially effective when considering timing your exits. Though I do not use them as a primary indicators in my exit strategy, they are very helpful in confirming what I do believe as the appropriate time to exit.
Many traders plot two SMA lines and time their trades as the two lines intersect. There are a wide variety of time periods used in implementing this technique. Most people will set one SMA at approximately 200 time periods and the other SMA as much shorter time period. This strategy can be very effective in timing and entries and exits, though I have found better methodologies in my trading to accomplish this purpose. There are however, a multitude of traders who swear by this method and it remains to this day a very popular trading method.
In summary, there are many uses that may be implemented using simple moving averages. I think it is important to not overlook these uses and implement them in useful ways. Because the SMA is a relatively basic calculation, it seems that, in recent years, it has been more or less ignored. In my opinion, that would be a terrible mistake because this indicator has a variety of uses that will greatly enhance your trading effectiveness.
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