4.9 Simple Vs. Exponential Moving Averages – Which is better?

Unfortunately no size fits all. Making a choice of which one to use depends upon the given circumstances, the time frame, the trading strategy, the analyst himself….blah…..blah!
But one kind is not necessarily superior to the other. So let us look at the choices.
To recap:
  • SMA is slow and has more lag (delay factor) than EMA and hence when the direction of the price changes, the SMA is slower to react than and EMA. Because of this factor the generation of signals by SMA is slower than those by an EMA.


  • EMA responds very fast to the change in the price and hence may tend to generate more false signals.
Comparison of EMA and SMA.

Are you a frequent trader who is looking to catch short-term trends?

Then the EMA, a short-period one, is your natural choice. Since the EMA is more responsive than the SMA, it will help you identify and bet on a new trend quickly. Unfortunately there is a problem attached to this, which is that sometimes it gets you quickly into a trade but not necessarily a trend. You see, since it is so quick to jump the trigger, with you following, the EMA does not know whether it is changing direction due to a temporary spike in prices, or a genuine turn of trend. Nor do you! So be prepared to take a few dud trades in your stride.

Are you a slow and steady, methodical and longer-term trader?

The SMA is suitable for you. It gives you a better perspective of the current trend because it is smoother. The downside here is, however, that it is much slower to respond than the EMA, and therefore you might not be able to identify many profitable, shorter-term trending trades. But then don’t forget that you have also been saved some fake break-outs which the EMA is prone to deliver.
The way forward
Practice, practice! The best way to find out which is suitable is to keep experimenting with both and find the one that matches best with your style of trading and temperament.

Another way is to cleverly use both! Use the SMA to identify the dominant and current trend. Then use the EMA to get you quickly into good trades in the direction of the trend. Ideally, use a longer period for the SMA, and a shorter one for the EMA.



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