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How Can One Best Use the Simple Moving Average?

Basic Day Trading Forex Strategies - Official Olymp Trade Blog

Many traders prefer simple and easy-to-use approaches to trading. This article provides two such approaches. The first one provides examples of the popular Simple Moving Average indicator as a technical analysis tool. The second one explains how you can trade on the news from Olymp Trade’s Insights notifications as an important fundamental analysis tool.

Contents:

Interact with the underlined words and green dots to get additional details and explanations.

Identify if the Instrument is Overbought or Oversold with SMA

The Simple Moving Average, abbreviated as “SMA” in this article and on the Olymp Trade platform, may be used to judge if the instrument price is about to rise or to decline. It using the following logic:

If in a certain period, the instrument price has been far above the SMA it can be taken as an indication that the instrument is overbought.

Usually, the longer the period of the SMA, the longer the price may stay above it before it is considered as a sign of being overbought. In this case, we expect it to fall and open a Down trade.

In the opposite scenario where the price has been below the SMA, we see it as a sign that the instrument is oversold.

Often, the longer the period of the SMA, the longer the price may stay below it before it is considered as a sign of being oversold. In this scenario, we expect the price to rise and open an Up trade.

Here is an example:

We have charted a 200-period SMA on the 1h price performance of  Litecoin. As you can see, the price has been above the SMA from March 1 till March 4. As per our logic, that means this instrument has been overbought and will likely decline shortly after.

Olymp Trade - Blog - Litecoin Chart - 10.03.2022
Fig. 1. Using the SMA to assess if the trading instrument is overbought or oversold

Checking if the Price Crossed the SMA

Observing a price far above the SMA may be a sign to open a Down trade. In the opposite scenario, seeing it far below the SMA suggests opening an Up trade. When exactly is it best to open a trade?

For that, we need to see if and when the price crosses the SMA.

If we continue with the  Litecoin example above, we can zoom in on the area where the price touches the SMA. As you can see, it dives under the SMA and stays close to the indicator instead of dropping further. Until the decline starts forming, we have to wait.

On the chart below, the red downward candles start forming after 14:00. For us, that would be a sign to open a Down trade.

When opening it, we would put a Stop Loss slightly above the SMA as the green horizontal line shows.

Olymp Trade - Blog - Litecoin Chart - 10.03.2022
Fig. 2. Identifying the moment to open a trade with the SMA

The logic is the actual crossing of the SMA is a sign to open a trade. Until the SMA has actually crossed, we have to wait.

Confirming the SMA Signal Using Two SMAs

A common way to cross-check the signal provided by the SMAs is to use both a long-term and a short-term SMA.

On the chart below, we have kept the long-term 200-period SMA and added the blue 20-period SMA as well.

Olymp Trade - Blog - Litecoin Chart - 10.03.2022
Fig. 3. Using the crossing of the two SMA’s to confirm the moment to open a trade

The logic to use the two in combination is the following:

When the short-term SMA crosses the long-term SMA from the top-down, that’s a sign to sell.

When the short-term SMA crosses the long-term SMA from the bottom-up, that’s a sign to buy.

Our case is the first scenario, and the candlesticks that correspond to the SMA crossing are marked by the short green horizontal line. That’s where we would open a Down trade.

How Can One Trade on Forex News with Insights?

You can trade economic news based on the Insights notifications on the Olymp Trade platform.

You can access them by tapping the question sign of the Help Center in the left sidebar and choosing Insights down below.

Olymp Trade - Blog - Help Center, Insights - 10.03.2022
Olymp Trade - Blog - Help Center, Insights - 10.03.2022

Choose the Time

Timing your trades well is key when trading on the news. That’s why at the bottom of each news box, there is a “Within the next” time section that specifies when the news will be released so that you can prepare beforehand. The time is reflected in your local time zone for your convenience.

Choose an Event to Trade On

Each event has a trading instrument or a variety of instruments whose price may potentially be affected by the release. To make it easier for you to filter those that may be most impacted by a news release, the sign of the corresponding trading instrument is shown in the top-left corner of the news box.

Understanding the News Releases

The most common approach to trading on calendar events is to open trades right after the news is released.

Whether you need to open an Up or a Down trade mostly depends on how the released figure or news is viewed against the forecast shown in the “Forecast” line of the news box.

If a released figure is better than the forecast for the economy, such a release is likely to instill optimism and push the price of the instrument upwards. Therefore, you can open an Up trade after the release in the expectation of an uptrend.

If a figure is worse for the economy than the forecast, such a release is likely to instill pessimism and press on the currency downwards. Therefore, you can open a Down trade after the release in the expectation of a downtrend.

For example, higher-than-expected GDP growth, employment, production and manufacturing indices, consumer outlooks and surveys, and other such data push the currency upwards.

In the opposite scenario, if these data come out lower than the forecast, the corresponding currency usually goes down as a result.

As a side note, every country’s regular economic data is released as per a certain schedule. For the US, this schedule is presented in a table below. It shows which week of the month usually contains what kind of economic data. Therefore, it may help you time and plan your trades better.

Week 1

US Unemployment Data

Week 2

US Inflation Data

Week 3

US Retails Sales and Property Data

Week 4

US Property and GDP Data

Be careful with the “inverted impact” news, such as unemployment rates.

Higher unemployment means bad news and hence drags the currency down. Vice versa, lower unemployment is positive news and pushes the currency up.

Examples of Trade Decisions Based on News Releases

In the image below, you can see the impactful news released on March 3 2022.

On March 3, we had the British Composite PMI for February release. The actual figure was 59.9. That was lower than the forecast of 60.2. That meant a disappointment for the market. Hence, such a release was likely to push GBP down.

This is what we would do upon that release:

  • We would open a Down trade on a currency pair where GBP stands first such as  GBP/CAD, GBP/JPY, or  GBP/NZD on an expected downtrend.
  • We would open an Up trade on a currency pair where GBP stands second such as  EUR/GBP on a possible uptrend.

On the same day, the US Initial Jobless Claims of 215K came out. It was lower than the expected figure of 226K. Generally, fewer unemployed people are good for the economy. Therefore, such a release usually brings optimism and is likely to push USD up.

Here is what we would do in this case:

  • We would open an Up trade on a currency pair where USD stands first such as  USD/CAD, USD/JPY, or  USD/CHF on an expected uptrend.
  • We would open a Down trade on a currency pair where USD stands second such as  AUD/USD or  EUR/USD on a possible downtrend.

Combine Technical and Fundamental Analysis

There is a reason why we have started this article by examining the use of the SMA and finished with reading the news. The first activity is technical analysis, and the second is fundamental analysis. It is better if you combine both in your trading routine. That is true regardless of your trading experience.

The Olymp Trade knowledge base helps experienced traders expand their knowledge in both technical and fundamental analysis. Fresh traders are encouraged to check out the first and the second as well.

Try Trading the News with Insights

Risk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.