Lesson #30 Comparison of SMA and EMA

Choose for a Simple or Exponential Average

For an Exponential Moving Average, using short period EMA would be your best option. That is because the moving averages will be able to quickly respond to any price action.

Because of this, you will be able to spot and act on emerging trends. It will significantly raise your chance of making solid profits from your trades. The fact is if you spot an emerging trend early, you will be able to ride on it longer to maximize your profits.

There is a danger though in reading choppy moving averages. You might get a fakeout. The averages could react quickly to any price adjustments. It will give you a false signal that a trend will emerge. In actually, the price movement could just be a simple spike.

The reverse is true for simple moving averages. This is probably the best you can use if you want a smoother moving average. This will respond quite slowly on any price action.

Simple moving average could save you from numerous fake outs precisely because of its slow reaction to price movements. However, this is also the downside of SMA. The delay could be too long that you will miss profitable trading opportunities.

Pros SMA: Smooth Chart Display; diminishes / eliminates most fake outs.

Cons SMA: Slow moving; big lag in buying and selling signals may affect profitability.

Pros EMA: Fast moving; best indicator to show recent price swings.

Cons EMA: Very susceptible to numerous fakeouts and provides wrong signals.

The big question now is which of two is better? Only you can answer this. Most traders create different moving average plots so they can have wider view of price movements.

You can use long period SMA to determine and identify overall market trend. And if you want to use shorter period trend analysis, then the exponential moving averages could be the best tool.

You will notice that most trading systems rely on the so-called Moving average crossovers. It is best to study and learn moving averages crossovers and understand how you can integrate it into your entire trading system.

You should play on the charts and see what moving average will be suitable for your trading style. By doing this, you will be able to grasp the concept of moving averages which could significantly help you.