Moving averages and exponential moving averages are two types of technical analysis tools used to identify trends in financial markets, especially in currency and stock trading. Here’s the difference between them and their uses:
1. Simple Moving Average (SMA):
It is the average price over a specific time period.
Formula:
SMA = (sum of prices over a number of periods) ÷ number of periods
Example:
5-day SMA = (price day1 + day2 + ... + day5) ÷ 5
Uses:
Identifying the overall trend (upward or downward)
Used to generate buy/sell signals when it crosses with the price or another average
2. Exponential Moving Average (EMA):
Gives more weight to recent prices, thus responding faster to market movements.
Features:
Faster in capturing price changes
More commonly used in scalping and fast trading
Basic formula:
EMA = current price × (smoothing factor) + previous EMA × (1 - smoothing factor)
Smoothing factor = 2 / (period + 1)
Example:
10-day EMA = (2 ÷ (10 + 1)) = 0.1818 or 18.18%
Usage in technical analysis:
Average crossovers:
Short EMA crossing with long EMA = Buy/Sell signal
Dynamic support and resistance:
EMA 50 or 200 acts as support or resistance
Scalping:
Using EMA 9 and EMA 21 for quick signals