How to Use Moving Averages to Find the Trend?2 min read
Moving averages are without a doubt the foremost popular trading tools. Moving averages are great if you recognize the way to use them but most traders, however, make some fatal mistakes when it involves trading with moving averages.
At the beginning, all traders ask the same questions, whether they should use the EMA (exponential moving average) or the SMA (simple/smoothed moving average). The differences between the two are usually subtle, but the choice of the moving average can make a big impact on your trading.
There is really only one difference when it comes to EMA vs. SMA and it’s speed. The EMA moves much faster and it changes its direction earlier than the SMA. The EMA gives more weight to the most recent price action which means that when price changes direction, the EMA recognizes this sooner, while the SMA takes longer to turn when price turns.
More than anything, moving averages work because they are a self-fulfilling prophecy, which means that price action respects moving averages because so many traders use them in their own trading.
You have to stick to the most commonly used moving averages to get the best results. Moving averages work when a lot of traders use and act on their signals. Thus, go with the crowd and only use the popular moving averages.
The EMA reacts faster when the worth is changing direction, but this also means the EMA is additionally more vulnerable when it involves giving wrong signals too early. For example, when price retraces lower during a rally, the EMA will start turning down immediately and it can signal a change within the direction way too early. The SMA moves much slower and it can keep you in trades longer when there are short-lived price movements and erratic behavior. But, of course, this also means that the SMA gets you in trades later than the EMA.