Exponential Moving Average (EMA) is similar to Simple Moving Average (SMA), measuring trend direction over a period of time. However, whereas SMA simply calculates an average of price data, EMA applies more weight to data that is more current.As a trader you might be thinking of one is better between the simple and exponential Moving Averages. Alright let's find out!
The exponential moving average.
The moving average is one of the most commonly used technical indicators. If you spent even a little time looking at price charts, you have noticed that the price of an instrument moves up or down.
When you want a moving average that will respond to the price action rather quickly, then a short period EMA is the best way to Choose.
These features can help you catch trends very early (more on this later), which will result in higher profit. In fact, the earlier you catch a trend, the longer you can ride it and rake in those profits (boo yeah!).
However, quicker responses can also be viewed as a disadvantage because the EMA is more prone to whipsaws (ie, false signals). And as a result of that you might get faked out during consolidation periods, that's terrible!
Because the moving average responds so quickly to the price, you might expect a trend is forming when it could just be a price spike. And This would be a case of the indicator being too quick for your own good.
While for the simple moving average, The main advantage of the SMA is that it offers a smoothed line, less prone to whipsawing up and down in response to slight, temporary price swings back and forth.
Although it is slow to respond to the price action, it could possibly save you from many fake outs.
The SMA's weakness is that it is slower to respond to rapid price changes that often occur at market reversal points. An easy analogy to remember the difference between the two is to think of a hare and a tortoise. The way they move.
The tortoise's movement is slow, like the SMA, so you might miss out on getting in on the trend early. Even though, it has a hard shell to protect itself, and similarly, using SMAs would help you avoid getting caught up in fakeouts.
On the other side , the hare moves quicker, so as like the EMA. It helps you catch the beginning of the trend but you run the risk of getting sidetracked by fakeouts (or naps if youre a sleepy trader). Check the Table below for a better understanding of the pros and cons of both SMA and EMA.
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