When it comes to forex trading, there are many strategies that traders can use to make profitable trades. One popular strategy involves using two technical indicators in conjunction with each other: the simple moving average (SMA) and the average true range (ATR). In this article, we will explain how to place an SMA over ATR in forex trading.
What is the Simple Moving Average (SMA)?
The simple moving average (SMA) is a technical indicator that is used to smooth out price action over a certain period of time. It is calculated by adding up the closing prices of a currency pair over a specified number of periods, and then dividing that sum by the number of periods.
For example, if you are using a 20-period SMA, you would add up the closing prices of the currency pair over the past 20 periods and divide that sum by 20. The result would be the SMA value for that period.
Traders use SMAs to help identify trends in the market. As the name suggests, the SMA is a simple average of prices, so it can be a good indicator of the general direction that a currency pair is moving.
What is the Average True Range (ATR)?
The average true range (ATR) is a technical indicator that is used to measure volatility in the market. It is calculated by taking the average of the true ranges of a currency pair over a specified number of periods.
The true range is the difference between the high and low prices of a currency pair over a given period, and takes into account any gaps in price action that may occur. The ATR is a useful tool for traders because it can help them determine the appropriate stop-loss and take-profit levels for their trades.
How to Place SMA over ATR in Forex Trading
Now that we have an understanding of what SMAs and ATRs are, let’s look at how to place an SMA over ATR in forex trading. This strategy involves using the SMA to identify the trend in the market, and the ATR to determine the appropriate stop-loss and take-profit levels for our trades.
Step 1: Choose the Time Frame and Currency Pair
The first step in using the SMA over ATR strategy is to choose the time frame and currency pair that you want to trade. This will depend on your trading style and preferences.
For example, if you are a day trader, you may want to use a shorter time frame, such as the 15-minute or 30-minute chart. If you prefer swing trading, you may want to use a longer time frame, such as the 4-hour or daily chart.
Step 2: Add the SMA to Your Chart
Once you have chosen the time frame and currency pair, the next step is to add the SMA to your chart. You can do this by selecting the SMA indicator from your trading platform and setting the number of periods you want to use.
For example, if you want to use a 20-period SMA, you would select the SMA indicator and set the period to 20.
Step 3: Add the ATR to Your Chart
The next step is to add the ATR to your chart. You can do this in the same way as you added the SMA, by selecting the ATR indicator and setting the number of periods you want to use.
For example, if you want to use a 14-period ATR, you would select the ATR indicator and set the period to 14.
Step 4: Identify the Trend
The next step is to identify the trend in the market using the SMA. If the SMA is sloping upwards, this indicates an uptrend. If the SMA is sloping downwards, this indicates a downtrend.
Step 5: Determine the Stop-Loss and Take-Profit Levels
The final step is to determine the appropriate stop-loss and take-profit levels for your trades using the ATR. To do this, you need to multiply the ATR value by a certain factor, depending on your trading style and risk tolerance.
For example, if you are a day trader, you may want to use a factor of 1.5 or 2.0. This means that you would multiply the ATR value by 1.5 or 2.0 to determine your stop-loss and take-profit levels.
Conclusion
The SMA over ATR strategy is a popular forex trading strategy that can help traders identify trends in the market and determine the appropriate stop-loss and take-profit levels for their trades. By using these two technical indicators in conjunction with each other, traders can make more informed trading decisions and increase their chances of making profitable trades.
