And secondly, you have to be clear about the purpose and why you are using moving averages in the first place.
There are two parts to this answer: first, you have to choose whether you are a swing or a day trader. In my trading, I use an SMA because it allows me to stay in trades longer as a swing trader.Īfter choosing the type of your moving average, traders ask themselves which period setting is the right one that gives them the best signals?! The SMA provides less and later signals, but also less wrong signals during volatile times. The EMA gives you more and earlier signals, but it also gives you more false and premature signals. In the end, it comes down to what you feel comfortable with and what your trading style is (see next points). But, of course, this also means that the SMA gets you in trades later than the EMA. The SMA moves much slower and it can keep you in trades longer when there are short-lived price movements and erratic behavior. For example, when price retraces lower during a rally, the EMA will start turning down immediately and it can signal a change in the direction way too early. The EMA reacts faster when the price is changing direction, but this also means that the EMA is also more vulnerable when it comes to giving wrong signals too early.
The pros of the EMA are also its cons – let me explain what this means: There is no better or worse when it comes to EMA vs. The EMA gives more weight to the most recent price action which means that when price changes direction, the EMA recognizes this sooner, while the SMA takes longer to turn when price turns. The EMA moves much faster and it changes its direction earlier than the SMA. There is really only one difference when it comes to EMA vs. The differences between the two are usually subtle, but the choice of the moving average can make a big impact on your trading. Step 1: What is the best moving average? EMA or SMA?Īt the beginning, all traders ask the same questions, whether they should use the EMA (exponential moving average) or the SMA (simple/smoothed moving average). In this article, I show you what you need to know when it comes to choosing the type and the length of the perfect moving average and the 3 ways how to use moving averages when making trading decisions. Moving averages are great if you know how to use them but most traders, however, make some fatal mistakes when it comes to trading with moving averages. Moving averages are without a doubt the most popular trading tools.
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