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EMA and SMA:  What's the Difference?

EMA and SMA: What's the Difference?

2010-06-30 21:04:00
Richard Krivo, Trading Instructor
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Instructor’s Response:

 
A Simple Moving Average (SMA) weights each candle and its corresponding closing price equally…no one candle's closing price is given more significance than any other candle in the equation.
 
In an Exponential Moving Average (EMA) more weight is given to the most recent candles. This type of moving average will react faster to the most recent trading activity. While at the outset this might appear to be the best way to go, keep in mind that whenever an indicator is "sped up", it will be more likely to provide more random ( false) entry signals.
 
Most traders and trading entities such as banks and hedge funds will employ the use of SMAs.
 
To see how these differences appear on a chart, take a look at the Daily chart of the EURGBP posted below.
 
The 100 period SMA is in black and the 100 period EMA is in green.
 
chart 6 30 10
 

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