EMA gives more weight (importance) to the most recent periods. The second major MA type is called Exponential Moving Average. As you can see the 60 SMA is further away from the current price and reacts very slowly to price changes because it is adding up the closing prices of the last 60 periods and then dividing it by 60. When the SMA period is longer, there is a bigger delay behind the price. SMA smooths out short term price fluctuations and makes it easy for the traders to tell if the market is trending up, down, or just ranging. It is necessary to understand the working of SMA because that way you can adjust the indicator in your benefit and be able to create different trading strategies. When you plot those average prices together, you can see a 5-hour Simple Moving Average on your chart. That would give you the average closing price over the last 5 hours. To do that, you need to add up the closing prices for the previous 5 hourly bars and then divide it by 5. For example, you are looking at an hourly chart and you want to plot a 5 periods SMA. You can easily calculate SMA by adding up the last “X” time period’s closing prices and then dividing by X. The first type is the Simple Moving Average. It is important to understand what the differences are between these two major types of MA. The most popular ones are Simple Moving Average (SMA) and Exponential Moving Average (EMA). There are several types of Moving Averages, depending on the way they are calculated. Simple Moving Average vs Exponential Moving Average Swing Traders look a longer time-frames and usually focus their analysis on 20, 50, 100, and 200 Moving Averages. These can be minutes, hours, or days according to the time-frame selected.ĭay Traders usually prefer to use short-term MAs like 10, 20, or 50. The most popular time periods used in Moving Averages are 10, 15, 20, 30, 50, 100, and 200 bars. Therefore, you should select a balanced period that gives enough details and is appropriate for your trading time-frame. However, too many data points will make all the ups and downs so smooth, that it can become hard to detect a trend. This means that single prices won’t affect the overall average so much. When you choose a longer period there will be more data points. This might not be very useful since it offers less insight into the overall trend of the stock price. Therefore, the MA will stay close to the current price. When you chose a shorter period there will be fewer data points. Vice-versa when the period is shorter, the MA is rough, but the reaction is quicker. The period is determined by the number of minutes, hours, or days chosen by the trader to calculate the MA of a particular trading instrument’s price.Īs a result, a longer period MA line is smoother but the reaction to price movement is slower. The smoothness of Moving Averages differs according to the duration of their time period. Thus, by looking at the slope of the MA line we can determine the current trend direction – uptrend, downtrend, or consolidation. As you can see, when you add an MA on the chart, it helps you get a clear picture of the direction of the trend by smoothing out the sporadic price movements. Instead, they tend to move in a particular direction, but with a different pace and frequent fluctuations. As you know market prices don’t move in a straight line. The single line over the price in the chart is the Moving Average. You can apply it easily, regardless if you are trading stocks, futures contracts, or Forex pairs. What makes the Moving Average one of the favorite technical indicators for a lot of traders is that it makes it easier to spot the direction of the current trend. 9.1 Check out some additional great content: How Moving Averages help you determine the trend?
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