SMA vs. EMA

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SMA vs. EMA

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Moving Averages (MA) help identify price trends and potential support and resistance levels.   Two main MA types are the Simple Moving Averages (SMA) and Exponential Moving Averages (EMA)

Simple Moving Averages are calculated by taking an average of the closing prices for (5, 10…) periods.

Exponential moving average (EMA) puts greater weight on the most recent prices, and thus has less lag than SMAs; it will react quicker to price changes.

SMAs change slower than EMAs and thus is better for traders with longer time frames.  EMA reflects price changes faster and thus is better for short-term traders.  Also important are the time frames used to calculate the SMAs and EMAs – long-term traders should use longer time frames (60+ periods), medium-term traders should use 20-60 periods while short-term trades should use 5-20 periods.

Trend indication: when the price is above an MA, the trend is up, and vice versa.

Support and resistance levels.  MAs, especially SMAs, can also be used as support and resistance levels.  During strong up(down) trends, prices tend to bounce off of the support and resistance lines.  When prices break-through the support and resistance lines, it can indicate consolidation or a reversal.

MA crosses are also used to identify price trends.  When a shorter MA crosses above the longer MA (i.e. 10-day SMA crosses a 20-day SMA), it’s a bullish indicator (“golden cross”), and vice versa (“death cross”).