SMA-indicator is one of the easiest and most affordable for trading in all financial markets, including binary options. It is already on almost all platforms, since this indicator is used at least from time to time by virtually all traders, even those who have been trading for many years. SMA is an abbreviation of the English name simple moving average, which means “simple moving average”.
What is a moving average?
The name accurately reflects the method of constructing a smooth line on a chart using mathematical calculus of a simple arithmetic average price value for a certain period. At each moment in time, the sum of the values of the last n candles or bars is taken. For example, if we are on the daily chart, then the total price value for the last n days is taken and divided by the number n, which the trader sets independently in the indicator settings.
In the Metatrader 4 platform, the period of the SMA indicator is practically unlimited, since there trading is also carried out on the long-term, that is, on large time frames, where the moving average is optimal with a period of 200 or even more. On binary options platforms, there is usually a limitation. For example, the SMA indicator in "Olympus Trade" cannot be built with a period of more than 60. This restriction does not reduce trading opportunities at all, since most binary options traders trade in the short term and a larger value of n is simply not necessary.
In the settings of the SMA indicator, it is also possible to specify the price value at which the indicator will be calculated. This can be the opening, closing, arithmetic or weighted average over the period of a candle or bar. Most often, the closing price is used in trade, since it is of particular importance when making trading decisions.
History of occurrence
For the first time, the SMA indicator appeared in the 60s of the last century and became very popular with traders, to which famous people like James Hurst and Richard Donchian certainly had a hand. It is the latter who is credited with authorship even in those days when he worked in investment funds and was fond of trade in the international currency market. By the way, a passion for trade came to him after reading the famous book of Jesse Livermore's “Memoirs of a stock speculator.” And although the book was written at the beginning of the last century, many successful traders today recommend reading it one of the first.
When Donchian, along with many other traders, suffered a crushing fiasco in trading during the crisis of 1929, he decided to reconsider his attitude to trade and began to develop a trading system using indicator analysis. And the basis of this system, which was called "following the trend", was based on moving averages.
The system of “turtles”, which brings even small, but stable profits, is also based on the same indicator. James Hurst also developed his own moving average trading system. It is described in his work under the title "Magic profitability in market timing on the stock markets."
What gives the SMA indicator
The main purpose of the moving average is to visualize a trend in the market. It would seem that the trend can be seen without any lines - the price goes either up or down, respectively, the trend is up or down. But not everything is so simple, and SMA allows you to more accurately determine the location of the price at the moment, and also simplifies decision-making. The simplest thing to take into account when looking at the moving average indicator on the chart is the position of the price relative to the indicator line.
For example, an indicator with a period of 200 is popular in long-term trading, and if the price on the weekly chart is higher than SMA200, then it is recommended to look for an entry into the market for a purchase. And vice versa. On the daily chart, it is better to use SMA with a period of 50 to make such decisions. In general, many traders select the indicator period for different assets and different time frames themselves. In any case, without testing the strategy, it is not recommended to use it in trading on a live account.
What are moving average trading strategies based on?
There are many SMA indicator-based strategies. But they all somehow come down to two options:
- trading on the rebound from the moving average;
- trading on the breakdown of the moving average.
Each of these options can be modified for yourself depending on the period, timeframe, etc. For example, the simplest way to trade is to enter a trade when the price crosses the indicator line on the chart. If the price crosses the line from the bottom up, we buy the Call option, and vice versa. The intersection is considered completed if the candle or bar closed behind the indicator line.
False signals and how to avoid them
However, when trading on moving averages, many false signals will invariably appear. To filter them out, someone uses additional indicators from another group, for example, oscillators. Another option for filtering is to wait until the price not only crosses the indicator line, but also consolidates in a new place.
Since the SMA indicator is a trend indicator, it begins to give false signals during a flat. We determine the flat when the SMA line takes a horizontal or close position. A flat is easier to determine when several indicators with different periods are used on the same chart. If all lines approach each other, the price enters the flat and trading based on the SMA readings becomes impossible.
Despite the fact that there are universal strategies based on movings, you always need to remember a simple rule. The more accurately the SMA indicator is configured for a specific instrument and timeframe, the better the trading results will be. Here are some examples of SMA-based binary options trading strategies.
Trading on a rollback
It is often said that the SMA line becomes support or resistance at different stages of market development. It is this postulate that forms the basis of the pullback trading strategy. At the same time, one should not literally understand the words “support” or “resistance”. In fact, no line is able to influence the behavior of prices; the price is affected by traders who use indicator tips on a massive scale. So, let's see how to use the SMA indicator on the rollback of the price from the moving line.
We choose an SMA period equal to, for example, 50. The 50-period indicator, which is popular with traders, is likely to show good results on many timeframes and instruments. We are waiting for the price to approach the moving and act depending on how it behaves. If the candle did not break the line, but closed on the same side, then look what the next candle will be. It should close in the opposite direction. This with a high degree of probability will mean that the price fought off the moving and went in the opposite direction.
This 50-period moving strategy shows good results on the 15-minute timeframe. The deal is concluded after closing the rotary candle. The expiration period is 6 candles, that is, an hour and a half. A significant drawback of the strategy is rare signals. You can increase their number by trading on several assets at the same time.
Two Moving Averages Strategy
Periods can be selected independently for each asset. But there are SMA indicators for binary options with periods that show good results on different instruments. For example, an SMA with periods of 5 and 25. We buy the Call option when the SMA 5 crosses the SMA 25 line from the bottom up and vice versa. The expiration time is 4-6 candles. We remind you that the strategy must be tested on a demo account before moving on to real trading.
The disadvantage of the strategy is the same as the previous one - signals appear infrequently. The following strategy based on the SMA indicator for binary options, which requires the construction of four movings on the chart, is deprived of this drawback.
4 SMA Strategy
We take the SMA with periods of 5, 21, 55, 89. We denote them on the chart in different colors. And there are three types of signals:
- SMA5 crosses SMA21, call or put option depending on the direction of the intersection; expiration period 1-2 candles;
- SMA21 crosses SMA55, expiration time 4-6 candles;
- SMA55 crosses SMA89, the expiration time is extended to 24 candles.
For all strategies based on moving averages, it is better to choose volatile assets and trade during the European and the beginning of the American sessions.