When it comes to charting the direction of a price over time, the moving average is a popular tool. It’s a widely used tool in stock markets, commodity markets, and Forex markets. However, there is more than one type of moving average available to traders, and they all have their own advantages and disadvantages.
The two main types of moving averages are exponential and simple. An exponential moving average, or EMA, gives more weight to recent prices and thus changes faster than a simple moving average, or SMA. This means that the EMA emits fewer false signals compared to SMA, bringing more accuracy to a trading system.
On the other hand, the SMA gives equal weight to all prices and therefore has a smoother curve than the EMA. This means that SMA can be less sensitive to accommodation shifts in the market, but at the same time it will generate delayed signals.
So which moving average should you use? That really depends on the nature of your trading strategy, so it’s important to research your options and try out different moving averages for yourself. For example, if you’re looking for an overall view of the market, you may prefer the SMA. If you’re looking for short-term predictions, the more responsive and exactness EMA could be a better fit.
All in all, both exponential and simple moving averages provide traders with different benefits and, depending on your trading strategy and the market conditions, one may be better for you than the other. Before making a decision, it’s essential to do your research and familiarise yourself with the options available.