In this video, we will be discussing a derivative of the simple moving average. By combining different SMA lines, you are able to quickly analyze the current market condition. This is also a warning, because the SMA is such an instrument, its use is mainly limited to analysis. So, don’t expect it to give you any clear signals of when to enter the market. What it can show you is most of all, the strength of any current trend. If you are a serious trader, it pays to know whether your market is trending or ranging.
In a nutshell, the trending market tends to either go up for a long time or go down for an extended period of time. Whereas, a ranging market usually displays much more sideways action. They may not be as clear as these examples though. Moreoever, the current strength of a trending market is hard to gauge. The three SMA method combines 3 different SMAs to show us the strength of any trend. The main thing is to measure the price development in the short, intermediate, and long-term.
In this first example, we have used a 3-period, 20-period, and 60-period SMA to show us the strength of the trend. When the short-term line is above the intermediater one, and the intermediate one is above the long-term line, we call this uptrend. Prices are generally rising and the more lines appear to diverge, the stronger the price movement is. When the short-term line is below the intermediate one, and that one is below the long-term line, we are in downtrend.
In this second example, the short-term line is below the intermediate one. It looks like that the market is trying to make up its mind. If you are a trend trader, you better stay out of this market.
© Prabhu for Forex Videos, 2018. |
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