Let’s take a look at when to use SMA versus EMA, and which one is better.
With moving averages in general, the longer the time period, the slower it is to react to price movement.
But with all else being equal, an EMA will track price more closely than an SMA.
Because of this, the exponential moving average is typically considered more appropriate for short-term trading.
The same attributes that make the EMA more suited for short-term trading limit its effectiveness when it comes to longer-term trading.
Since the EMA will move with price sooner than the SMA, it often gets whipsawed, making it less than ideal for triggering entries and exits on “slower” chart timeframes like daily (or longer).
The SMA, with its slower lag, tends to smooth price action over time, making it a good trend indicator, allowing it to remain long when the price is above the SMA and short when the price is below the SMA.
So SMA or EMA? It’s really up to you to decide.
You don’t have to limit yourself to a single type of MA or a single instance of an MA.
Many traders plot several different moving averages to give them both sides of the story.
They might use a longer period simple moving average to find out what the overall trend is, and then use a shorter period exponential moving average to find a good time to enter a trade.
There are a number of trading strategies that are built around the use of moving averages. In the following lessons, we will teach you:
Time for recess! Go 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.
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