SMA vs EMA - Which Moving Average Should You Choose? // exponential or simple dma difference david moadel
welcome to looking at the markets with David Modell this is going to be a
discussion on SMA or simple moving average versus EMA which is exponential
moving average those are two main types of moving averages and I coach a lot of
students on trading and indicators and investing and I get that question all
the time you know which should I be looking at which should I be using the
SMA or the EMA and it's really a matter of personal choice there's no better one
they're just different alright so you can choose whichever one you like now
whether it makes a difference or not depends on the time frame when you're
when you're using a very long look-back period for example the 200-day moving
average or the 300 a moving average which is a long time frame then it
doesn't matter as much there's not a that big of a difference between the EMA
and the SMA the shorter the time frame the bigger the difference is okay or the
longer the time frame the less the difference is so when you're using a
very long time frame like here's the apple daily candlestick chart and I've
got as you can see the 200-day simple moving average in blue and the 200-day
exponential moving average in red and they're almost the same they're
practically right on top of each other I don't see a lot of difference so when
you have a long time period or long look-back period like here's 200 days
for example there's not a lot of difference it almost doesn't matter
which one you use all right now let's say we change it to a shorter time frame
such as the 20-day simple and exponential moving averages and I'm
using stockcharts.com right now by the way I want to give them credit alright
so I'm going to click update after changing 200 and 200 to 20 and 20 still
the Apple daily chart and notice that they're quite different now all right
with the 200 with the long look-back period of 200 days they were practically
right on top of each other but now that the look-back period or
time frame is much shorter 20 days in this case once again the blue line is
the simple 20 day moving average and the red line is the exponential 20 day
exponential moving average and we can see that it's much more different and
the exponential moving average well first of all let me tell you the actual
difference the simple moving average is just an average so for with this one
with the blue line they just take the last 20 candles all right the last 20
closing prices I should say and add them up and divide by 20 it's just an average
a simple average and it's moving because it keeps changing every day as you can
see with every close of every candle now with the exponential moving average it's
weighted with more importance given two recent candles so the more recent price
action is given more weight or more emphasis in the average it's a weighted
average all right so we can see how the red line the
exponential moving average is a little bit more reactive it it reacts first
alright which you might or might not like the simple moving average there
blue lion is more slow and steady it reacts a little bit more slowly and so
it's not necessarily going to give you as many signals if you use it as a
trading signal but you may not want so many signals you may want to wait for a
more solid signal more confirmation and so more signals is not necessarily a
better thing it's up to you whether you want something more reactive and
something that gives more signals like an exponential moving average would or a
simple moving average which is more slow and steady and less reactive alright so
for example when Apple stock went down here we can see that the red line the
exponential moving average reacted first and reacted more strongly it went down
first whereas the simple moving average took
its time to react to it so it's less react
give it it doesn't move with every single candlestick with every little
movement to the price action alright and then when Apple came back up again
we can see that the exponential moving average moved first Andrea it just went
up faster whereas the simple moving average just took its time to react to
it all right and then when it went down we can see the red line went there first
and especially at the end here we can see how wobbly the exponential moving
average can be whereas you know up down up whereas the simple moving average
pretty much stays steadier okay so it's up to your preference and if you're a
day trader here's an example from trading view comm and again I chose
Apple why not this is the 1-minute candlestick chart each candlestick
represents one minute of price action and I put the 25 period so it measures
the closing prices of the last 25 most recent 25 candlesticks and the simple
moving average is just an average of those 25 most recent closing prices
while the exponential moving average takes more recent price action into
account and many day traders prefer exponential moving averages because they
want to place emphasis on recent price action all right they don't want to look
back too far because they're a day trader a lot of day traders are scalpers
they're just going for quick - get in quickly get out quickly make small
amounts of money over and over and that's fine and so that's understandable
that day traders might often prefer the exponential moving average because it
takes very recent price action very heavily into account because they have
to think up to the minute up to the second alright so here we have the blue
line is the simple moving average and the red line is the exponential moving
average and once again we can see when Apple stock goes up the red line the
exponential moving average is more reactive and it goes up first whereas
the the blue line the simple moving average
pretty much almost stays horizontal it hardly moves at all it really needs more
confirmation and a bigger move in the price action to cause the simple moving
average to to move alright and again over here we can at the end here we can
see how wobbly the exponential moving average can be it's really wobbly while
the simple moving average is less wobbly less volatile less reactive it's up to
your preference neither one is better or worse it depends what you're looking for
in your moving averages and in your buy and sell signals or whatever you use
you're using moving averages for alright so I hope that helps you to decide which
one to use which one fits your personal needs and preference alright so as I
mentioned I do coach people on these things and if you'd like some help with
putting together a trading or investing plan because you need to have a plan
otherwise you're not probably going to do too well if you don't have a plan and
if you don't really understand indicators and as well as fundamentals
and we could talk about stocks options commodities currencies crypto currencies
whatever it is you like you can contact me anytime my name is David Modell my
email address is David Modell moa de el @ gmail.com thank you so much for
watching and listening and I'll talk to you again soon