If there is one indicator most widely used by the big guns (i.e: financial institutions, banks, etc), it is the 200-day Simple Moving Average (SMA).
In the previous article, we have told you that Moving Average (MA) is an extremely popular indicator that is commonly featured in trading platforms. It helps trader to understand the overall pattern of price movement by smoothing out price fluctuations. However, we haven't explained how to use it practically. In this series, we are going to talk about practical use of MA in predicting forex trends. The first is about SMA-100 and SMA-200 crossover.
How to Set Moving Average in Trading Platform
MA in forex trading platform Metatrader 4 (MT4) can be found in Insert > Indicators > Trend > Moving Average, as shown in the following picture.
Afterward, there will appear a pop-up window where you could fill in your preferences of period and MA method (SMA, EMA, or WMA), as well as the line's colour. Below is a pict of it.
In the example, I chose period of (200) with MA method (Simple). Meaning, the indicator will be a 200-day Simple Moving Average. As MA is a lagging indicator, 200-day SMA is a really slow line and better used to observe long-term trend.
If there is one indicator most widely used by the big guns (i.e: financial institutions, banks, etc), it is the 200-day Simple Moving Average (SMA). It is mostly used in conjuction with fundamental analysis, based on the theory that because many players used it, then the market will reacts if price movement touches the SMA-200 line. It is also famous as long-term indicator; if price moves above the lime green line, then we can assume that the market is in uptrend. While if price moves under the line, then the market is in downtrend.
SMA-100 and SMA-200 Crossover
Another strategical use of SMA-200 is by combining it with SMA-100 to detect buy and sell signals. Crossing points between the two line is the signals. Buy signal appear when SMA-100 line cut SMA-200 line in its way upward. While the sell signal appear when SMA-100 line cut SMA-200 line in its way downward.
To do it, first you have to determine the time frame you want to use. As it is a mid-term indicator, I suggest you to choose between H4 or Daily time frame. Please note that the line will look different in a different time frame, so choose carefully.
Afterward, repeat the steps to put in the indicator as mentioned above. Do it twice; first for the SMA-100 with red line, and then for the SMA-200 with lime green line or any other colors as long as you could easily distinguish them.
EUR/USD Chart in Daily Time Frame 27 May 2013-8 Jan 2014
You can see on the picture, that there is a buy signal on 23 August 2013. The red line (SMA-100) cut the lime green line (SMA-200) on its way to the top.
In the following picture, you will see sell signal in a different time frame.
EUR/USD Chart in H4 Time Frame 13 Dec 2013-23 Jan 2014
Sell signal appear when the red line cut SMA-200 line in its path downward.
Do I have to open position as soon as the sma-100 crosses sma-200?
No, actually you can wait for a while until there are sufficient confirmation that the trend really is going that way. However, don't wait too long, because the market won't be waiting until you are 100% sure of the move.
Can I put in another period in simple moving average beside of 100 and 200?
Yes, of course you can. Quite many traders combine them with SMA-50, which means they use three lines over there. You can also use a variety of other periods; like 30, 50, and 100, or even 10, 21, and 50. It's all up to you. In fact, there are many other uses of simple moving average, especially the SMA-200.