Simple vs. Exponential Moving Averages

Exponential Moving Average (EMA) is similar to Simple Moving Average (SMA), measuring trend direction over a period of time. However, whereas SMA simply calculates an average of price data, EMA applies more weight to data that is more current.As a trader you might be thinking of one is better between the simple and exponential Moving Averages. Alright let's find out!

The exponential moving average.

The moving average is one of the most commonly used technical indicators. If you spent even a little time looking at price charts, you have noticed that the price of an instrument moves up or down.

When you want a moving average that will respond to the price action rather quickly, then a short period EMA is the best way to Choose.

These features can help you catch trends very early (more on this later), which will result in higher profit. In fact, the earlier you catch a trend, the longer you can ride it and rake in those profits (boo yeah!).

However, quicker responses can also be viewed as a disadvantage because the EMA is more prone to whipsaws (ie, false signals). And as a result of that you might get faked out during consolidation periods, that's terrible!

Because the moving average responds so quickly to the price, you might expect a trend is forming when it could just be a price spike. And This would be a case of the indicator being too quick for your own good.

While for the simple moving average, The main advantage of the SMA is that it offers a smoothed line, less prone to whipsawing up and down in response to slight, temporary price swings back and forth.

Although it is slow to respond to the price action, it could possibly save you from many fake outs.

The SMA's weakness is that it is slower to respond to rapid price changes that often occur at market reversal points. An easy analogy to remember the difference between the two is to think of a hare and a tortoise. The way they move.

The tortoise's movement is slow, like the SMA, so you might miss out on getting in on the trend early. Even though, it has a hard shell to protect itself, and similarly, using SMAs would help you avoid getting caught up in fakeouts.

On the other side , the hare moves quicker, so as like the EMA. It helps you catch the beginning of the trend but you run the risk of getting sidetracked by fakeouts (or naps if youre a sleepy trader). Check the Table below for a better understanding of the pros and cons of both SMA and EMA.

When to Use SMA vs. EMA

As you now understand the two, it is then important to know when to apply any. We know With moving averages in general, the longer the time period, the slower it is to react to price movement. But with all else being equal, an EMA will track price more closely than an SMA. For this reason, the exponential moving average is typically considered more appropriate for short-term trading.

The same characteristics that make the EMA more suited for short-term trading limit its effectiveness when it comes to longer-term trading.

As the EMA will move with price sooner than the SMA, it often gets whipsawed, making it less than ideal for triggering entries and exits on “slower” chart timeframes like daily (or longer). The SMA, with its slower lag, continues to smooth price action over time, making it a good trend indicator, permitting it to stay long when the price is above the SMA and short when the price is below the SMA.

It is therefore left to you as a trader to decide whether EMA or SMA. You dont need to limit yourself to a single type of MA or a single instance of an MA. Also Most of the traders create several different moving averages to give them both sides of the story.

They can choose to use a longer period simple moving average to find out what the overall trend is, and then use a shorter period exponential moving average to find a good time to enter a trade, and this gives them both sides experience.

There are a number of trading techniques that are set around the use of moving averages. In the following lessons, we will guide you to know:

• How to use moving averages to determine the trend

• How to use multiple moving averages together

• How moving averages can be used as dynamic support and resistance

Let's stop here for now, You should Go find a chart and start playing with some moving averages to understand what we have discussed in this lesson more. Try out several types and try experimenting with different periods. While practicing, you will find out which moving averages work best for you and gives you best results.