Traders often use indicators to be able to analyse the markets better. Moving averages are the ones most commonly employed. There exist various types of them and so you may utilise them in different ways. Today we will see into some ideas for using the Simple Moving Average with the period of 10.
What is the Simple Moving Average?
The Simple Moving Average is an indicator that calculates the average price over a specific time period. When we set the period at 10 it will mean that the calculations are based on the last 10 candles.
How do you calculate the SMA10?
It is quite straightforward. We have to take the last 10 closing prices and divide them by 10. For example, if the closing prices for the last 10 days were $11, $12, $13, $14, $15, $16, $17, $18, $19 and $20, the calculations will look as follows:
11+12+13+14+15+16+17+18+19+20 = 155
155 / 10 = 15,5
$15,5 is the average price during the last 10 days.
Let’s say that the next day the candle closes at $10. The calculations will change to these:
12+13+14+15+16+17+18+19+20+10 = 154
154 / 10 = 15,4
The average price for the last 10 days is now $15,4.
How the SMA look like on the chart?
To add the SMA to your chart you should click on its name on the indicators list. Then, it will be visible over the price candles. It has a form of a line. Why is it a line? Well, the average price is a point. With the appearance of a new candle new calculations are made. By connecting singular values a line is formed.
The SMA10 creative trading ideas
Moving averages can be used in myriad manners. How to make the most out of our short-term Simple Moving Average?
Set a stop loss with the SMA10
Observe the price bars and the SMA10 line and you will notice that the price tends to respect this indicator. Use it to set a dynamic stop loss. If the market is in an uptrend, the SMA10 will act as the support. During the downtrend, it will constitute resistance. Trail your stop loss together with the SMA10. Exit when the price closes above its line (during the uptrend) or below when there was a downtrend.
Trade pullbacks when price rejects the SMA10
It was already said that the price tends to respect the SMA10 line. It nears it and then bounces back. On this basis, you are able to recognise the strong trend. The price should bounce from the SMA10 at least twice.
The next step is to wait for the price rejection pattern such as a hammer or an engulfing pattern. After such a confirmation you may enter a trading position.
Use the inside bar
The inside bar is a candlestick that is totally consumed by the preceding candle. The pattern appears when there is indecision between bulls and bears in the market.
Pullbacks will not happen all the time and it might be a good idea to use inside bars on such occasions. Spot the inside bar formation and enter when it is broken. If it happened on the uptrend, set a stop loss over the high of the inside bar. In the downtrend, the stop loss may be placed below the inside bar’s low.
Moving averages are popular among traders and there is a reason for it. They are not complicated but offer a lot of possibilities for your transactions.
Since the price seems to respect the 10-day Simple Moving Average, the indicator can function as a dynamic stop loss. Then, you can enter when the price pulls back to its line or after the inside bar pattern is broken.
Go to the practice account offered absolutely for free for Olymp Trade users. Check how easy it is to trade with the Simple Moving Average.
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