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One of the easiest methods in Technical Analysis is the Simple Moving Average or SMA. It is the simplest type of all the moving average. The SMA shows the average price of a given time period. And each period carries the same weight for the average. SMA helps to smooth the price curve for better trend identification. In fact, the longer the SMA period selected, the smoother the curve.

Since it is the simplest of all the moving average, the math behind SMA is also simple. The average price of a certain period is represented by SMA and it is calculated by summing up the prices of instrument closure over a certain number of single periods divided by the number of time periods. Take note that short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.

SMA = SUM (CLOSE (i), N) / N

Where:SUM - sum; CLOSE (i) - current period closing price; N = number of periods in calculation.

For example you want to plot a 5 period simple moving average on a 1-hour chart, you should add up the closing prices for the last 5 hours and then divide it by 5. If you want to plot 5 period simple moving an average on a 30 minute chart, then you should add up the closing prices of the last 150 minutes and divide it by 5. So if you want to develop an SMA chart for USD/JPY closing price in a 5-day time frame, how would you do it?

For example the first 5 days USD/JPY closing prices are 125.0, 124.0, 126.0, 123.0, and 127.0. The average of the first 5 days USD/JPY closing price that will be the first dots of the SMA graph is 125.0. The second SMA point will be (124.0 + 126.0 + 123.0 + 127.0 + 126.0)/5= 125.2 if we assume the USD/JPY closing price for the day six is 126.0. So the calculation goes on for the following dots. And joining these SMA dots defines the SMA chart. In other words, SMA is the average stock price over a certain period of time.

Formula for the 5 period SMA 5 period SMA = (Price1 + Price2 + Price3 + Price4 + Price5) / 5

Simple Moving Average operates with a delay just like any indicator. You are forecasting of the future price, not a concrete view of the future, because you are just taking the averages of the price. Although all calculations will be provided by most charting packages, it is important to understand how simple moving averages are calculated. By understanding, you can decide on which type of tool is best for you. from http://www.forexfloor.com

Technical analysis is one of the two methods of analyzing Forex; fundamental analysis is the other. These two methods are very important in the Forex trading by forecasting the variations of the Forex market, prediction of the price and the movement of the market. Although technical analysis and fundamental analysis differ greatly, they both predict a price or movement. In this article, Forex technical analysis will be analyzed in detail.

Technical analysis is a method of forecasting price movements and future market trends through the study of past market action which take into account price of instruments, volume of trading and open interest in the instruments. Unlike fundamental analysis, technical analysis is focused with what has actually happened in the Forex market, rather than what should happen. There are certain technical analysis tools such as the relative strength index (RSI), which is a price-following oscillator that ranges between 0 and 100; the Elliott waves method, which deals in the prediction of the market movement by the study of wave patterns over a period of time; the parabolic SAR methodology, in which the prices are examined and compared to stop and reversal numbers which are an indication of entry points and exit points for any Forex trade; the stochastic oscillator, which shows the over bought or oversold currencies on a scale of 0- 100%; and gaps, which denotes the spaces on the bar chart that none of the trading takes place.

Technical analysts are confident that historical performance of stocks and markets denote future performance. They use charts and other tools to identify patterns that can suggest future activity. They do not attempt to measure a security's intrinsic value. They study the price and volume movements. And they create charts from that data. A technical analyst would rather sit on a bench in a certain mall and watch people going into the store. He decides basing on the activity of people going into each store. But if he is a fundamental analyst, he would rather go to each store and study the products on sale. Later he decides whether to buy or not. In other words, technical analysts disregard the intrinsic value of the products in the store. From the point of view of technical analyst, anyone can gain the profit by posing himself in the trend direction. Consequently, they use different patterns in order to create the price chart that will suit the future market and the price would follow the pattern.

In summary, Forex technical analysis focuses on what actually happens in the market. The charts are based on market action involving price, volume and open interest. It is always focused with the pricing and time factors rather than the factors affecting the market. Thus technical analysts study the effects, not the cause of market movement. Adapted from http://www.forexfloor.com

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