200 SMA technical indicator is one of the most favorite indicators in the Forex trading. This tool can be found on the graph of many hedge funds and market makers as a main indicator. Few technical methods can be as necessary to a forex trader as resistance and support. And while there are many systems of searching important levels, few are as interesting as the 200 SMA for the very reason we told at the first of this post : the significant for a self fulfilling analysis to take place as Forex traders react by open short position if market price resists at the 200 SMA, or open long position if market price is supported by the 200 SMA.
Forex traders can find level stops under these points if searching to trade in the trend direction. In the chart above, upon noticing that market price had tested of the 200 SMA, Forex traders could find to open buy position with a risk under the 200 Simple Moving Average. So, when market price doesn't trade higher, the Forex trader can find to exit the trade before the loss getting bigger to an undesirable price. The chart below will describe this strategy in more detail :
One of the main desires of such a system is the thought that the Forex trader could be able to take in the trade in the trend direction. After all, if market price is trading bearish to the 200 SMA, then market price is trading bearish after having previously traded above that price; indicating that the market trend was previously to the uptrend. This gives us to other usage of the 200 Simple Moving Average; as a indicator to identify market trends.
The 200 SMA as a trend filter
Market price has crossed the 200 SMA only once in 2012 on Euro Dollar. Market price traded just six such crosses in 2011, over 3 different examples; many of which were followed by an extended move in the currency instrument in that trend direction. The chart below will describe in more clearly :
Each example of crossover trading was followed by a corresponding extended trade, with sizes of those trades indicated in the following graph
200 SMA Simple Moving Average trading system
Forex trader can make trading systems with 200 Simple Moving Average. as was seen chart above, market price may trade for an expanded time after crossing the 100 simple moving average. so, if market price trades above the 200 simple moving average, forex trader can find to open buy position with a stop loss at the moving average line. With this, when market price does pull back then the forex trader can contain the loss to a palatable price. Another way, if market price trades under the 200 SMA, forex traders can search to open sell position or setups as a trend filter.
For example a Forex trader wanted to trade with Relative Strength Index. Well, traders can do so by filtering trades to just take entries that agree with the 200 SMA. So, when market price is above the 200 Simple moving average, forex trader is just opening trades if Relative Strength Index technical indicator crosses up and over 30 ; or when market price is under the 200 Simple Moving Average the Forex trader is just trading sell entries on Relative Strength Index crosses down and below 70.
Risk Management
While forex traders may take to use many of different trading systems, the common desire to trade in the trend direction gives special relevance to the 200 SMA. If market price crosses the 200 SMA, many forex traders may be making notice and when market price moves under the support or above the resistance – that can be taken as a sign that the previous trend is over and a new trend may be developing.
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