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Forex Indicators and patterns

The Simple Moving Average (SMA) indicator

The Simple Moving Average (SMA) indicator is one of the most straightforward measures available to traders.    It is a trend-defining indicator that isn’t necessarily made to be used in range-bound markets, but they can show you when that condition is approaching, thereby keeping you out of the market or having you switch the tools that you use. What is the simple moving average indicator? The simple moving average indicator is a measure of the average price over a certain amount of <a href="/uk/trading-academy/indicators-and-patterns/japanese-candlesticks/">candlesticks</a>.    For example, if the 20-day simple moving average indicator is added to a chart, it will calculate the average price over the previous 20 days. The indicator updates itself at every candlestick and creates a line that goes up and down on the chart, showing the overall flow of where the market is going.    There are other versions of moving average indicators, but the simple moving average indicator is the easiest to use. You simply measure the average closing price of a certain amount of candles, divided by that many candles.    This gives you the average price, and as time goes on the various levels are connected by a line, giving traders a clear view as to whether the average price is rising, falling, or simply going sideways over a certain amount of time.   It can be used on any timeframe, but there are some that do tend to be used more than others.  How to add a simple moving average indicator to MetaTrader To add a simple moving average indicator to your charts, click on the 'Insert' menu, choose 'Indicators', and then select 'Trend', where you will find 'Moving Average' on that menu. A dialog box will pop up with the title 'Moving average', giving you several options.    The 'Period' box allows you to select how many candlesticks you wish to calculate the average price of, and then the 'MA method' allows you to select which type of moving average you want to apply. In this case, you would obviously select 'Simple.' You can also choose to apply to either the close, high, low, or open, but 99% of what you will see involves the close. <img alt="adding the Simple Moving Average indicator" src="https://k13-dev.thinkmarkets.com/TMXWebsite/media/TMXWebsite/adding-SMA.jpg" /> How the simple moving average indicator is typically used The most common way this indicator is used is to determine the overall trend. Notice the red line that is sloping lower on the chart below. It shows that we are clearly grinding lower over the course of the last several days on the hourly chart in the AUD/NZD pair.   The slope going lower is a function of the average price drifting lower and lower over time. Notice how at the beginning of the chart the 20 SMA was rising, but then the price broke down through the moving average to show that something had changed.   Shortly after that, you’ll notice that a majority of the candlesticks were below the 20 SMA, showing that price had changed from rising over the course of the previous 20 hours to falling.    This shows an overall trend change, and it gives you an idea as to whether you should be long or short a currency pair. In this case, it’s obvious that selling the Australian dollar against the New Zealand dollar was the right way to go. The moving average shows you just how right it was. <img alt="ALT: example of a 20 SMA trading strategy" src="https://k13-dev.thinkmarkets.com/TMXWebsite/media/TMXWebsite/20-SMA-strategy.jpg" />  For example, at the blue arrow you can see that the market was clearly in an uptrend and pulled back towards the 50 day EMA where we saw the market bounce significantly from that level and continue to go higher.  One way that you could have looked at this is that the 'hammer' that had formed on the daily chart right at the 50 day simple moving average was a sign that buyers were finding dynamic support there. Later on, you can see that the market broke down below the 50-day simple moving average indicator, but then bounced back towards it where the red arrow shows a selling opportunity based upon a massive bearish candlestick.  Later on, it tested the general vicinity of the 50-day simple moving average indicator three times where it sold off each time it got too close to it.  At the very end of the chart the market closed well above the 50 day EMA and then started to rocket to the upside showing the 50 day EMA starting to slope higher, confirming than that the trend has obviously changed for the upside in favor of the Euro instead of sloping lower in favor the British pound like it had been previously.   Another use for simple moving average indicators is to look for 'moving average crossovers'. This typically is used for 'buy and sell signals' and some traders even go so far as to always stay in the marketplace based upon how the signal is showing, either bullish or bearish. That being said, the simplest explanation is that you take a faster moving SMA and plot it with a slower moving SMA on a chart. In this example, we will use the CAD/CHF daily chart. On the chart, there is the red 20 day simple moving average, and the white 50 day simple moving average.  In a 'moving average crossover system', the idea is that as the quicker moving average rises above the slower one, shorter-term traders are starting to come in and momentum is moving to the upside. At that point, traders will buy the market.  On the other hand, when the faster moving average dips below the longer-term moving average, then it shows that short-term traders are starting to push momentum to the downside, and it becomes a sell signal. In this scenario, you buy when the indicator of the shorter time frame breaks higher, and you sell or find yourself short when the lower timeframe indicator breaks underneath.  When you look at this chart, you can see the inherent problem with using this system without any type of filter. There would have been five potential losses before the market finally broke in your direction and would have had you selling into a major breakdown.  One simple filter is to look at the longer-term simple moving average indicator, and what the slope is. For example, in this chart you can see that we were relatively flat for most of this, and that may have kept you out of the market as it shows that we weren’t really trending.  On the final crossover, and the one that the market is currently trading, you can see that the longer-term 50-day EMA started to slope lower, and the two moving averages started to spread out, showing that there was a real divergence between the two time frames, and that momentum was picking up.  In the end, quite often the simple moving average indicator is used with something along the lines of an oscillator in order to determine momentum, and possible diversions. There are other indicators people will use with it, but it seems to be oscillators are by far the most common.   Some common simple moving averages   While there is no 'magic bullet', there are some common ones that are popular:   <ul> <li>10-SMA, for fast moving short-term trades</li> <li>20-SMA, for slightly longer term momentum on short-term trades</li> <li>50-day SMA, which represents just a bit underneath a quarter</li> <li>100-day SMA, which represents half a year</li> <li>200-day SMA, which represents roughly one year of trading based upon trading hours</li> </ul>

6 min readBeginners

Forex Indicators and patterns

Using the Bill Williams Accelerator Oscillator

The Bill Williams Accelerator Oscillator is an indicator that was developed by Bill Williams, a well-known technical analyst responsible for designing multiple commonly used trading tools. In fact, there is an entire Bill Williams section of indicators included with Metatrader 4.    In this particular indicator, the indicator looks at momentum and when that changes. This can quite often lead to a change in price shortly thereafter. After all, if the momentum in an uptrend is starting to slow down, that could suggest that there is less interest in that financial asset. This typically will lead to profit-taking and even selling. In the inverse, momentum to the downside will start to slow down before buyers come in and pick the market up or simple short covering happens.    The indicator will not only suggest when the direction of momentum starts to change, but it also looks at whether there is an acceleration in the change of momentum. This is very useful information because it can lead to an opportunity to close out a trade that is profitable, or perhaps open up a new one relatively early in the trend change.  <h2 dir="ltr">How to add Bill Williams Accelerator Oscillator to MetaTrader 4 </h2> Adding the Bill Williams Accelerator Oscillator to your Metatrader platform is simple. You simply need to click on Insert, followed by Indicators, followed by Bill Williams, and then finally choose Accelerator Oscillator. It’s worth pointing out that the Bill Williams set of indicators is included in all platforms, so there is no need to download anything else.    <img alt="Adding the Bill Williams Accelerator Oscillator to Metatrader" src="https://k13-dev.thinkmarkets.com/TMXWebsite/media/TMXWebsite/BW-Accelerator-image-1.jpg" />   Once you choose the indicator, the dialog box will pop up with a couple of different choices. The Value Up, and the Value Down are both available to change as far as colors are concerned, and then you can change the Fixed minimum and Fixed maximum.For the purposes of this article, we will be using the default settings, but if you choose to experiment, you can easily do so on a <a href="https://portal.thinkmarkets.com/account/individual/demo" target="_blank">demo account</a> without risking any of your trading capital. <h2>How the Bill Williams Accelerator Oscillator is calculated</h2> The indicator is calculated like most oscillators are, using a couple of moving averages. As usual, this oscillator will have a faster moving average and a slower moving average. The Accelerator Oscillator ends up showing a histogram that is a moving average that is the fast moving average calculation minus the slow <a href="/uk/trading-academy/indicators-and-patterns/sma-indicator/">moving average</a>.  In other words, it takes the difference between the two input moving averages and creates a third moving average representing part of the final equation. This calculation ends up being the AO which then has a Forming moving average subtracted from it in order to smooth out the results. It should be noted that the AO is actually the Awesome Oscillator that Bill Williams also has developed. This is simply a more complex version of that indicator itself.    The calculation works like this:  <ul> <li> Fast moving average minus slow moving average to end up with “AO”</li> <li> Forming moving average used as a smoothing tool</li> <li> AC equals AO minus forming moving average for indicator output</li> </ul> <h2>How to Use the Bill Williams Accelerator Oscillator strategy</h2> The Bill Williams Accelerator Oscillator is an indicator that measures whether momentum is likely to continue. When you add the indicator, it opens up a window at the bottom of the platform, like most other oscillators. It has a zero line, showing whether it’s going to be easier for acceleration or deceleration to increase in momentum. The Accelerator Oscillator crossing above or below the zero level doesn’t necessarily mean that there is a trade, but it does suggest that traders need to pay attention to the patterns that they are looking for in price before making a trade.    For example, if the Accelerator Oscillator is above the zero line and printing green bars, this suggests that it’s going to be easier for acceleration to continue going to the upside. On the other hand, if red bars are being printed below the zero level, then it suggests that deceleration in speed and momentum is likely to continue or even expand. That of course is a very bearish sign.   <img alt="The Bill Williams Accelerator Oscillator on a chart" src="https://k13-dev.thinkmarkets.com/TMXWebsite/media/TMXWebsite/BW-Accelerator-image-2jpg.jpg" />   Bill Williams himself suggested that if you are buying above the zero line then you are trading along with the overall momentum. He also suggested that if you are selling below the zero line you are doing much the same. He said that you only need to see two bars in a row in order to see enough agreement with the oscillator to open up a new trade in that direction.   He also said that if you are buying below the zero line, you need to see three green bars in a row to buy the asset below that level. Alternatively, if you are looking to short a market but the Accelerator Oscillator is above the zero line, you need to see three consecutive red bars print before doing so.   Take a look at the chart below. There are multiple red arrows on it suggesting areas that someone using the Bill Williams Accelerator Oscillator would be interested in selling. You’ll notice that at the top of the chart there were <a href="https://k13-dev.thinkmarkets.com/en/trading-academy/forex/japanese-candlesticks">several candlesticks</a> that went back and forth in order to suggest a flattening market. Below there and in the Accelerator Oscillator window you can see that the indicator was forming several red bars in that region. You should also notice that the print just above the zero line that formed to green bars was very short in length.   This suggests that momentum is shifting over a longer term as well, as it spends almost all of its time underneath the zero line regardless of color. Later on, you can see that price had been rallying and forming several green bars in a row.    This technically was a buying opportunity in the short term, but more importantly notice that after four green bars the indicator started printing red bars again, albeit above the zero level. It should be noted that momentum is dropping rapidly, as not only is deceleration increasing, but the length of the bars in the indicator are starting to drop towards the zero level again.   <img alt="The Accelerator Oscillator in action" src="https://k13-dev.thinkmarkets.com/TMXWebsite/media/TMXWebsite/BW-Accelerator-image-3.jpg" /> Bill Williams Accelerator Oscillator as an Early Warning System One of the great aspects of the Bill Williams Accelerator Oscillator is that it can function as an early warning system. For example, if you start to see price rising but the Accelerator Oscillator rolling over, that can be the first sign of trouble. It functions very much like divergence in any other oscillator, when momentum is moving opposite of price.   When trading, most of the time you are looking to go with the overall trend. However, when you can find out that the trend is about the end or at least there is going to be a significant pullback, you can save a considerable amount of your trading capital by taking profits at that point. At the very least, it gives you an opportunity to move your stop loss closer to the current price of the financial asset that you are trading.    Take a look at the chart below. The Australian dollar/New Zealand dollar pair on the weekly timeframe is shown. You will notice that on the far left-hand side there is a pair of blue arrows that shows a market that was clearly in a downtrend, but the Accelerator Oscillator was starting to rise. In fact, it had formed a couple of green bars. This was a sign that the downtrend was running out of momentum.   <img alt="Accelerator Oscillator as a early warning system" src="https://k13-dev.thinkmarkets.com/TMXWebsite/media/TMXWebsite/BW-Accelerator-image-4.jpg" />   A little while later, you can see that the market had clearly been in a strong move to the upside but notice how by the time the first red arrow on the chart is pointed out, the histogram in the Accelerator Oscillator formed a “lower high.” Beyond that, the histogram also started to turn red while price was still rising slightly. This was the beginning of the end for the buyers, and as you can see not only could a buyer have taken profit, but short-sellers could have been looking for an opportunity to sell which did in fact present itself shortly thereafter.    And even later on the chart, you can see that price was rising again, but this time the histogram in the indicator didn’t rise above the previous time. Price did, but the momentum did not and that is classic divergence. Notice how the indicator started to drop from that level, forming several red bars. Furthermore, it ended up dropping below the zero line and eventually the markets fell rather significantly. What’s interesting about these examples is that you had several candlesticks to react. In this case, that means several weeks. The same principle would of course apply to a five minute chart, so timeframe is rather irrelevant, but it does suggest that you have time to make a decision or at least look for confirmation of that potential scenario.    All of this shows that the Accelerator Oscillator can function on several fronts, not only as a confirmation of a potential set up but also has the ability to tell you when to exit a trade or trend. This makes it extraordinarily valuable, even though it’s not one of the more well-known indicators. It should also be noted that quite often Bill Williams has suggested that some of his other indicators should be used in congruence with this one, but it’s crucial that you understand how this indicator functions on its own, and thereby you can choose to build a system based upon some of his others.

6 min readBeginners

Indicators and patterns

Discover how to identify potential trading opportunities by reading and analysing charts effectively.