Simple vs Exponential Moving Averages



Simple Vs Exponential Moving Averages

After having being lectured on the subject regarding the Simple and the Exponential Moving Averages, you would want to know which is better so as to implement it on your next forex trade.

Although the differences between the SMAs and the EMAs are very clear, neither one is better than the other. The EMA are less lagging and therefore more receptive to current prices including price changes. The EMAs will react faster than the SMAs. On the other hand, the SMAs represent an actual average of values for the whole period of time. Therefore, the SMAs may be more suitable to pin point the support level or resistance level. Moving average preference relies on time horizon, analytical style and objectives.

To elaborate further on the above differences, if you want a moving average to react faster it is best to use a short period EMA. These will give you the opportunity you need to seize trends much sooner than expected, which in turn gain more profits. So the fact is, the sooner you seize a trend, the longer you can stay with it and bank in those profits.

The negative aspect of using the EMA is that during the periods of consolidation, it might be a false one. As the EMA reacts so fast to the price, you will think a trend is being created when later to discover that it is only a price spike.

For a SMA, it is a reverse. If you want a moving average to react slower to the price and smoother, it is best to use a longer period SMA. This would work best when looking at a longer period of time as it could give you an insight of the trend in the whole.

Even though it is slow to react to the momentum, you could possibly be saved from the false one. The negative side of using the SMA is that it might keep you waiting for too long resulting in you being missed out on an ideal entry point including a profitable trade.

To assist you to remember, below are the advantages and the disadvantages of using the SMA and the EMA:

SMA – Presents a smooth chart that removes false signals
EMA – Fast moving and good at presenting current price actions

SMA – Slow moving that may result in a lag in trading signals
EMA – More likely to produce errant signals and cause false one too

Now that you know the advantages and the disadvantages of these two moving averages, you should know what to do.

Most traders use various moving averages so as to see both sides of the coin. They might plot a shorter period EMA to pin point the best time for trade entry, and then plot a longer period SMA to check out what is the overall trend.

It is irrelevant whether an EMA or a SMA should be used as both indicators are trend-following. The best thing to do is to get a chart and try out with all the various moving averages and you will in time, discover which one is suitable for you.