Greetings Traders and welcome back to another in depth with Chris guide.
In today's discussion.
We will be talking about this Simple Moving Average.
This is a very simple indicator to use.
So those of you that like technical analysis based discussions
while you're in for a treat because we will be covering a
technical analysis based indicator.
This is a tool that many traders use it has been used for
quite some time.
We're going to cover all of the variables that go into calculating
it but more importantly we're going to talk about some Prodigies
that can be derived from using a simple moving average after
all of this.
Hopefully, you will be more geared towards passing
your Gauntlet Mini challenge.
But before we go any further, let's go ahead and show you
how you can apply it to your charts.
That way you can follow along the entire time if we're using
the Finamark platform.
We're going to go up to the top Center portion of our screen
and we're going to click the show indicators options button.
Once we do this, we're going to click new collection and
it will populate our available indicators that overlay price
what we're going to do then is we're going to scroll down
to where we see Simple Moving Average.
We're going to give that a click and we're going to go back
to our charts.
And now we have a simple moving average applied to the charts.
If we're interested in changing any of the settings when
we go to the right hand column over here if we click the
cogwheel, we can change the color of the simple moving average
or the period but without further ado, let's get going
and if you haven't yet, please do me a favor and click that
like and subscribe button down below so I can keep coming out
with content for you guys, but here we go.
As you browse the internet in search of more trading knowledge
or trading strategies,
you will almost certainly come across some type of SMA strategy
which stands for the Simple Moving Average.
This Simple Moving Average is something that calculates the
average of a selected range of prices, which usually is adhering
to the closing prices by the number of periods in that range.
As we mentioned at the beginning of our video the SMA line
can be adjusted by what is called the period the period is
going to be how many candles are how many periods are being
averaged together to generate these plotted points which
then create the SMA that we are seeing across the chart here.
We have a few different SMAs, which is why they're all not
exactly in the same location. An SMA with a smaller period
is averaging a smaller amount of data.
It's a lower amount of time and as such, the line is going
to more closely adhere to price. An SMA that is averaging
a longer period of time is going to be a line that slightly
looks a bit smoother really that is going to kind of work
its way through price occasionally but isn't going to follow
it so directly the shorter SMA periods are usually more preferable
for shorter-term trading because it's a faster-reacting line.
Where is the longer periods are generally going to
be our preferred method when we're looking to trade longer
term periods.
Now in the world of SMA, there are generally going to be
5-day SMAs, or 5-period SMAs, 10-period SMAs and 20-period SMAs.
These are all extremely common Simple Moving Average period
settings on this chart.
That's exactly what we have the blue line represents the
5-period moving average the purple line represents the
10-period moving average
and the green line, which is going to be the one
that's kind of the smoothest with the least amount of jitters
is going to represent our largest period on this chart of
the 20-period moving average.
Once again, the preference there is no right or wrong here
and it's just a matter of which one is going to fit the current
market conditions and my particular trading style.
It's very common for traders to use a series of different
periods. That way they have a faster reacting SMA as well
as a longer-term better indication of the overall trend
in conjunction with it.
On this chart, we can see a 50-period a 100-period, and a 200-period
SMA so we can see how they are quite a lot different
than the shorter periods that we just looked at on the previous
chart. The 50-period here
is going to be our blue line.
The 100 is going to be our purple line and the green line
is going to represent our 200-period.
This is going to be an example of when we were looking for
maybe longer term trends that we be interested in using these
much higher period SMAs because they are calculating such
a larger amount of data such a larger time span that will
give us a better depiction of the overall longer-term activities
versus those more intraday day trading style activities that
the 5, 15 or 20-periods might be providing us with. Let's take
a moment to understand how the SMA Works. Many external factors
can impact short-term movement in investment markets such
as the E-Mini S&P 500 which is one of my favorite futures
markets. This could be a short-term political event disappointing
employment figure that was released or some type of just
regular intraday volatility.
Any type of unexpected development can cause the market to
fluctuate many of these issues can be resolved or forgotten
within a 24-hour period.
So the key for traders is generally not to overreact to this
if they're doing more long-term investing.
So what is the best way that traders can achieve this?
Hypothetically anyway, well, using averages of the prices
over a specified period of time can help flatten the curve
and reduce the impact of concise term short concise short-term
price fluctuations that are occurring.
This is why short-term traders prefer that 10 and 20-period
moving average while longer-term traders may use a 50, 100
or 200-period moving average the key to short and medium
and long-term Investments success is to make sure that we're
always on the side of the prevailing trend and the SMA allows
us to do just that when we're using the SMA to give us a
better indication of where the trend is going whether it's
the short term Trend using the shorter SMA settings or it's
the long-term Trend using the larger SMA settings.
It can provide us an edge over those that aren't aware of
what this information might actually be.
Let's talk about how the moving average is calculated the
Simple Moving Average that is if we were to look at a 5-day
moving average as an example and look at the different points
that are plotted and once the points are plotted and connected.
we are generated with a line.
Let's talk about whole those points are calculated.
Let's say five point one, for example, that's going to happen.
When we add the closing prices from days 1 through 5 and
divide by 5.
That's going to give us our first plot point. Then for day 2
we're going to have, or I'm sorry, for our data point 2, to not day 2,
we're going to add our closing prices from day 2 to day 6
and then divide by 5.
and that will give us our second plotting point which will
connect one and two as we get to our third plotting point.
We're going to add the closing prices from day 3 to day 7
and divide by 5.
And as we go down this list, you'll see that this continues
on in a very similar fashion.
It's exactly the same.
We just progressively continue forward.
And one day as you can see day 1, day 2, day 3, day 4, day 5,
day 6, day 7, and as we do this we keep stepping forward with
the days that we are calculating and plotting the points
and it gives us an average of all of those closing prices
over the period of time being measured.
Now let's talk about some Simple Moving Average trading strategies.
The first one to talk about will be the bullish crossover
and a bullish crossover occurs when the share price or whatever
it is that we're measuring moves through the SMA into higher
ground as we can see over here on the left from our first
shaded area the indication of the market moving above our
SMA lines could be considered a bullish crossover and an
indication of bullish momentum.
I'm to come this is a very standard way to interpret what
price is doing in relation to the SMA as all of these lines
that you see here are interchanging.
The reason behind that is because some of these lines are
going to be shorter-term lines that are going to more quickly
react to the bullish momentum with the blue line here.
You can see that it's a shorter-term line because it immediately
started working its way higher as price also started going
higher, whereas the purple line was a little bit slower to
act followed by the green line indicating.
The green line is our longest term SMA on the chart at the
moment these crossovers where price is going to go above
or below the SMA is a very simple way to analyze if the market
is potentially exhibiting bearish or bullish behavior in
relation to how it's been behaving on average. When we start
adding multiple SMAs to our line with different periods the
intersections of these lines, maybe a 5, 15, and 20 can give
us a better insight into when we might actually want to jump
into the market for that buy or sell. It can kind of add
a further layer of confirmation and direction to where we
exactly want to buy and sell with the concept being, if the
shorter line begins moving upward,
we don't immediately buy as it follows price, which obviously
at that point would be above it.
But instead, we wait for the shorter line
and all of the other lines to rotate if it's all three
lines for example right here where they're going downwards
with the highest period on top, the middle period in the middle
and the shortest period on bottom. When all of them rotate
to the other scenario where the shortest period is on top
the middle is still in the middle, of course, but the low
is the longest period is on the bottom, when this happens
when all the lines make the flip that can be an opportunity
for us to go long and take advantage of some bullish momentum
to follow. There's quite a few scenarios where we watched
this happen from both directions. The same concept applies
if the momentum was up and then all three of our lines flipped
downwards now the periods that we use is going to be something
that we're going to need to test with the market and the
conditions that were currently analyzing but the idea and
the concept is very simple.
We're literally paying attention to faster and longer term
interaction of moving averages and paying attention to how
They're interacting with each other and using that information
to them justify an entry to either go long or to go short
if they're flipping from bullish to bearish and have completely
flipped their organizational factor there where the blue
and purple and green have flipped the order the other way
around, well, then we can look for a cell opportunity in that case.
Something else to consider is that SMA interaction with price
or SMA interaction with other smas of different periods their
interaction can also trigger exits from the market not just
entries if hypothetically we were long right over here when
the lines flipped bullishly when we saw the lines flip
bearishly we could use this as our indication to close our
position out because we anticipate some scary bearish momentum
thereafter. So the justification for getting in can also
be our justification for taking our profit and getting out.
Trading with SMAs can provide some very clear-cut advantages.
The main one being that it can flatten that short-term volatility
and make sure that we're trading in the direction of the
trend. The old adage for us traders is, the trend is your friend,
and that's because if we're trading in the direction of the
prevailing trend, we're already giving ourselves a chance
to go in the direction that's already happening
and therefore we should already theoretically be increasing
our accuracy because we're not fighting the wave.
We're not fighting the current. Instead,
we're simply going in the direction that it's already going. Does
that mean every trade that we place is going to be a winner?
Absolutely not because the market goes up and down in the
short term, but if we're going in the direction of the prevailing
market, then we're already giving ourself a step up over
those that are going against it. SMA trading has disadvantages as well
and they really resolve around the fact that if you don't
have your SMA calibrated correctly, it might switch sides
in relation to price or your other SMAs a little bit too
early for the conditions that you're measuring which is why
we encourage using a bit of a practice run making sure that
you are adjusting your SMA lines and running backwards through
briefs and price to make sure that they're responding in
a way that had you been trading at that time.
It would have proved profitable for you.
If it is, then you've got your settings dialed in and you're
ready to go.
If not, then we should probably keep calibrating and work
further or work along the lines of adjusting those lines
a little bit further, but until next time folks,
thank you for joining me,
as always.
It's always a pleasure.
I will see you soon.
Happy trading.
Happy hunting over and out.