Thu. Dec 1st, 2022

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Simple vs. Exponential Moving Averages

2 min read

Exponential Moving Average (EMA) and Simple Moving Average (SMA) are similar in that they each measure trends. The two averages are also similar because they are interpreted in the same manner and are both commonly used by technical traders to smooth out price fluctuations.

There are some differences between the two measurements, however. The primary difference between an EMA and an SMA is the sensitivity each one shows to changes in the data used in its calculation.

SMA calculates the average of price data, while EMA gives more weight to current data. The newest price data will impact the moving average more, with older price data having a lesser impact.

More specifically, the exponential moving average gives a higher weighting to recent prices, while the simple moving average assigns equal weighting to all values.

Since EMAs place a higher weighting on recent data than on older data, they are more reactive to the latest price changes than SMAs are, which makes the results from EMAs more timely and explains why the EMA is the preferred average among many traders.

The SMA is the most common type of average used by technical analysts and is calculated by dividing the sum of a set of prices by the total number of prices found in the series.

Therefore in short, the slower-moving average, SMA is usually used to confirm a trend rather than predict it. It is good for longer-term trades and can also be used to calculate EMA. The slow pace could mean missing a good trade entry point if you rely on SMA alone. On other hand,  EMA is a faster-moving average that places more emphasis on recent price data. It is good for short-term trades where the most current price data is the most relevant. The average is very reactive to new prices.

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