You’re probably wondering which is superior by now.
Which is better: the simple or exponential moving average?
Let’s begin with the exponential moving average.
When you need a moving average that responds fast to market action, a short period EMA is the way to go.
These can assist you in detecting trends extremely early (more on this later), resulting in bigger profits. In fact, the sooner you recognize a trend, the longer you may ride it and reap the benefits.
The disadvantage of utilizing the exponential moving average is that you may be fooled during consolidation periods.
Because the moving average reacts so quickly to price changes, you may believe a trend is building when it is only a price surge. This is an example of the indicator moving too quickly for your own good.
The opposite is true for a simple moving average.
When you want a smoother and slower moving average to respond to market activity, a longer period SMA is the way to go.
This is useful when looking at longer time frames because it might give you an indication of the general trend.
Although it is sluggish to react to market movements, it may rescue you from many fake outs.
The disadvantage is that it may cause you to miss out on a favorable entry price or the deal entirely.
Consider a hare and a tortoise to help you remember the difference between the two.
Because the tortoise, like the SMA, moves slowly, you may lose out on getting in on the trend early.
It does, however, have a strong shell to protect itself, and employing SMAs will assist you avoid getting caught up in fakeouts.
The hare, on the other hand, is as fast as the EMA. It aids in catching the beginning of a trend, but you risk being diverted by fakeouts (or naps if you’re a sleepy trader).
The table below will help you recall the benefits and drawbacks of each.
| SMA | EMA | |
|---|---|---|
| PROS | Displays a smooth chart that eliminates most fakeouts. | Quick Moving and is good at showing recent price swings. |
| CONS | Slow-moving, which may cause a lag in buying and selling signals | More prone to cause fakeouts and give errant signals. |
When to Use SMA vs. EMA
So, which is superior?
In general, the greater the time period, the slower the moving average reacts to price fluctuation.
However, if everything else is equal, an EMA will track price more closely than a SMA.
As a result, the exponential moving average is generally thought to be more suited for short-term trading.
The same characteristics that make the EMA more suitable for short-term trading limit its usefulness in longer-term trading. Because the EMA moves faster than the SMA, it is frequently whipsawed, making it less than ideal for triggering enters and exits on “slower” chart timeframes such as daily (or longer).
Because of its slower latency, the SMA tends to smooth price action over time, making it a strong trend indicator, allowing it to stay long when the price is above the SMA and short when the price is below the SMA.
So, is it SMA or EMA? It is entirely up to you to make your decision.
You are not limited to a particular type of MA or a single instance of an MA.
Many traders plot multiple moving averages to get both sides of the story.
They may utilize a longer period simple moving average to determine the overall trend, followed by a shorter period exponential moving average to determine the best timing to initiate a trade.
A variety of trading strategies revolve around the usage of moving averages. We will teach you the following things in the lessons that follow:
1. How to use moving averages to determine the trend
2. How to use multiple moving averages together
3. How moving averages can be used as dynamic support and resistance
Next Lesson: How to Use Moving Averages to Find the Trend
