Simple Moving Average (SMA) is one of the easiest and popular technical indicators on the Forex market used to find trend's direction. Simple Moving Average is calculated as an average arithmetic value of Close prices for a certain number of time frames:
Where: n – the number of bars chosen for calculation of MA, Pj is the Close price on a given time frame (M5, М15, М30 etc.).
Number of taken bars defines MA's period. That is to say, if moving average is calculated for the last five Closes, it is 5-periods' MA. It is accepted to take number of periods from Fibonacci sequence, more often, it is 5, 8, 13, 21 and 55, and less often it is 200. Also some traders calculate SMA using Open prices, according to an average value of close and open price or an average value of bar's High and Low. But there are no fundamental differences between above-listed methods, and no one takes an evident advantage against the others.
An example of Simple Moving Average built with period 13 and 8
Despite its simplicity, MA is one of the most important instruments of technical analysis. And the most part of more complicated indicators is built on its basis. For example, a very popular method is a simultaneous building of two MA with different periods, more often, МА13 and МА5 (or MA8). Upon that, crossing point of those MA signalizes of change of price direction.
Main disadvantage of SMA is its delayed action, wherefore indicator's reading come with delay. The bigger calculation period is chosen, the bigger delay is and with smaller period we get more false signals. In practice, for every financial instrument, more appropriate MA time period is chosen. Currency pair with high volatility requires shorter time-frame.
Besides, supplementary features of MA allow it performing as support or resistance line, which is notable under clearly expressed trends.