A **simple moving average** (SMA) is the simplest type of moving average.

Basically, a simple moving average is calculated by adding up the last “X” period’s closing prices and then dividing that number by X.

Confused???

Don’t worry, we’ll make it crystal clear.

If you plotted a 5 period simple moving average on a 1-hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5.

Voila! You have the average closing price over the last five hours! String those average prices together and you get a moving average!

If you were to plot a 5 period simple moving average on a 30-minute chart, you would add up the closing prices of the last 150 minutes and then divide that number by 5.

If you were to plot the 5 period simple moving average on the 4 hr. chart… Okay, okay, we know, we know. You get the picture!

Most charting packages will do all the calculations for you.

The reason we just bored you (yawn!) with a “how to” on calculating simple moving averages is that it’s important to understand so that you know how to edit and tweak the indicator.

Understanding how an indicator works mean you can adjust and create different strategies as the market environment changes.

Now, as with almost any other forex indicator out there, moving averages operate with a delay.

Because you are taking the averages of past price history, you are really only seeing the general path of the recent past and the general direction of “future” short-term price action.

** Disclaimer: Moving averages will not turn you into Ms. Cleo the psychic! **

Here is an example of how moving averages smooth out the price action.

On the chart above, we’ve plotted three different SMAs on the 1-hour chart of USD/CHF. As you can see, the longer the SMA period is, the more it lags behind the price.

Notice how the 62 SMA is farther away from the current price than the 30 and 5 SMAs.

This is because the 62 SMA adds up the closing prices of the last 62 periods and divides it by 62.

The longer period you use for the SMA, the slower it is to react to the price movement.

The SMAs in this chart shows you the overall sentiment of the market at this point in time. Here, we can see that the pair is trending.

Instead of just looking at the current price of the market, the moving averages give us a broader view, and we can now gauge the general direction of its future price.

With the use of SMAs, we can tell whether a pair is trending up, trending down, or just ranging.

There is one problem with the simple moving average: **they are susceptible to spikes**.

When this happens, this can give us **false signals**. We might think that a new currency trend may be developing but in reality, nothing changed.

In the next lesson, we will show you what we mean, and also introduce you to another type of moving average to avoid this problem.

Lesson 6: What is a Japanese Candlestick? Lesson 7 :Japanese Candlestick Anatomy Lesson 8:Basic Japanese Candlestick Patterns Lesson 9: Single Candlestick Patterns Lesson 10: Dual Candlestick Patterns Lesson 11: Triple Candlestick Patterns Lesson 12:Japanese Candlestick Cheat Sheet Lesson 13: Candlesticks with Support and Resistance Lesson 14: Common Mistakes That New Traders Make With Japanese Candlesticks Lesson 15: Summary: Japanese Candlesticks

Lesson 16 : Fibonacci Trading Lesson 17: How to Use Fibonacci Retracements Lesson 18: Fibonacci Retracements are NOT Foolproof Lesson 19: How to Use Fibonacci Retracement with Support and Resistance Lesson 20: How to Use Fibonacci Retracement with Trend Lines Lesson 21: How to Use Fibonacci Retracement with Japanese Candlesticks Lesson 22: How to Use Fibonacci Extensions to Know When to Take Profit Lesson 23: How to Use Fibonacci to Place Your Stop so You Lose Less Money Lesson 24: Summary: Fibonacci Trading

Lesson 25: What Are Moving Averages? Lesson 26: Simple Moving Average (SMA) Explained Lesson 27: Exponential Moving Average (EMA) Explained Lesson 28: Simple vs. Exponential Moving Averages Lesson 29: How to Use Moving Averages to Find the Trend Lesson 30: How to Use Moving Average Crossovers to Enter Trades Lesson 31: How to Use Moving Averages as Dynamic Support and Resistance Levels Lesson 32: How to Use Moving Average Envelopes Lesson 33: How to Analyze Trends With Moving Average Ribbons Lesson 34: How to Trend Trade with Guppy Multiple Moving Average (GMMA) Lesson 35: Summary: Using Moving Averages

Lesson 36: How to Use Bollinger Bands Lesson 38: How to Use the MACD Indicator Lesson 37: How to Use Keltner Channels Lesson 39: How to Use Parabolic SAR Lesson 40: How to Use the Stochastic Indicator Lesson 41: How to Use RSI (Relative Strength Index) Lesson 42: How to Use Williams %R (Williams Percent Range) Lesson 43: How to Use ADX (Average Directional Index) Lesson 44: Ichimoku Kinko Hyo Lesson 45: Trading with Multiple Chart Indicators Lesson 46: What is the Best Technical Indicator in Forex? Lesson 47: Summary: Popular Chart Indicators