Simple vs. Exponential Moving Average
Moving Averages, next to volume, are probably the most common technical indicators traders will use on their charts. Moving averages are great at showing support and resistance levels when charting stocks. Often you will see the 200 moving average acting as support or resistance over the price history of a stock.
Both the Simple Moving Average (SMA) and the Exponential Moving Average (EMA) measure trends over time. The common definition is that these technical indicators are commonly used to smooth out price fluctuation over time. As mentioned previously, it also helps identify support/resistance levels.
The Difference
The key difference between the SMA & EMA is how their measurement of the trend is calculated.
The Simple Moving Average SMA calculates the average price over time as equal values.
The Exponential Moving Average EMA calculates the average of price over time, but gives more weight to recent price action. This means that the more recent price data will weigh more on the average with older price data having less weight.
Moving Averages in Action
It’s important to remember, that none of these technical indicators will ever guarantee success as a trader. They are simply helpful tools that can provide support to your ideas!
Check out this daily chart of Apple where we use the 20/50/100/200 EMA to show support and resistance for the stock over a year of time.
Or check out this chart on NVDA how it respects the 200 EMA. If you have any charts that showing Moving Averages working out perfectly, let us know using the form at the bottom of this page!
Moving Averages for Swing Traders
When swing trading, it’s a much different approach then day trading and typically swing traders use higher time frames like the 4 hour, Daily, Weekly and beyond.
Tip: Using SMAs (simple/smooth moving average) is more appropriate for swing trading as opposed to EMAs (exponential moving average) which reacts faster.
Here’s the top list:
20/21 period MA will tell you the short trend term of the stock.
50 period MA will show you the medium trend of a stock – so for those who like to hold for weeks-months this is a really ideal MA to use
100 period MA is attractive to traders because it works very well and holds true for support and resistance – best when used on the daily/weekly time frame.
200/250 period MA is very popular and is most important for long term trading, and can act as a “line in the sand” as to whether the stock is bullish or bearish overall.
These are tips on how to read and understand Simple and Exponential Moving averages for trading. The more you learn, the more you earn! If you have any questions or comments about EMA or SMA, feel free to use the contact form below to get in touch with us.
