Now that you know both Simple and Exponential moving averages, you probably have a lot of questions on your mind.
Which one is better? And which one should you use?
And that’s exactly what this lesson is all about.
We will answer any questions you may have and more.
Let’s start off by a comparing these two technical indicators.
As you already know, both EMAs and SMAs are generally interpreted in the same way, with both used by technically focused traders to smooth out price fluctuations.
The key difference between a simple moving average and an exponential moving average is the sensitivity each one shows to shifts in data within its calculations. The EMA places a heavy focus on recent prices, whereas the SMA assigns equal weighting to all values.
Generally, forex traders believe that the EMA edges the SMA, but choosing one over the other really depends on what it will be used for.
As always, it’s good to be familiar with both of these indicators, and only time will tell whether the EMA or SMA will play a significant role in your trading strategy.
Having said that, let’s explore when you should be using SMA and EMA.
Simple moving averages have been around for quite a while but the truth is that they still hold up.
Kind of like the ‘rona. It’s been here for a while and it doesn’t look like it’s going away any time soon.
Anyway, back to SMAs.
What makes them so strong and continually relevant is their versatility.
Forex traders make use of SMAs by identifying reversals and trends, measuring the strength of an asset’s momentum, and determining potential areas where an asset will find resistance or support. More on all this in the next lessons.
SMAs work well when looking at longer time frames, as they are smoother and slower, and therefore provide traders with the idea of the overall trend.
The downside is that it might delay you too long, and you might miss out on a good entry price or the trade altogether.
SMAs aren’t the most sophisticated technical indicator in the world, but they can still provide value as part of a trading strategy, and are definitely worth trying out.
The exponential moving average is typically considered more appropriate for short-term trading.
So if you want a moving average that will respond to the price action rather quickly, then a short period EMA is the best way to go.
EMAs can also help you catch trends very early (more on this later), which can result in HIGH profits.
In fact, the earlier you catch a trend, the longer you can ride it and rake in those profits (hell yeah!).
The downside of using the exponential moving average is that the moving average responds so quickly to the price, you might think a trend is forming when it could be a fake out during consolidation periods instead (oh no!).
Let’s have a look at how the 20 EMA compares to the 20 SMA on a daily GBP/USD chart.
As a forex trader, you probably love charts. So here’s another one for you. This time, we’ll compare the 50 EMA and the 50 MA.
Ultimately, it all comes down to YOUR personal preference and there’s certainly no harm in plotting both on the chart and seeing how they compare.
Both have their own strengths and can be successfully applied in different situations.
Time for recess! Find a chart and start playing with some moving averages!
Try out different types and try experimenting with different periods. In time, you will find out which moving averages work best for you.
See you in the next lesson!