There are two types of Moving Averages that technical analysts use to identify overall market trends and potential cycles, the Simple Moving Average and the Exponential Moving Average. Each technical indicator is designed to smooth out fluctuating data to show an average value of an instruments price over a user defined period of time.
The following quick video tutorial explains the differences between the SMA & EMA:
Simple Moving Average
A Simple Moving Average (SMA) is an average price range, or mean, in its simplest form. The SMA indicator in NinjaTrader defaults to a 14 period, or 14-day moving average. It’s calculated by adding the most recent 14 closing prices of an instrument and dividing that sum by 14.
The term “moving” is incorporated into both a Simple Moving Average & Exponential Moving Average as these indicators “move” onto the next available data in a FIFO (first in first out) mentality. As the new data is available, closing price, the oldest data is dropped.
Exponential Moving Average
An Exponential Moving Average (EMA) is a more sophisticated version of the SMA as the EMA treats more recent data more relevant when compared to historical data. While the SMA assigns an equal weighting to all prices, regardless of its relation to time, an EMA applies a heavier weighting to recent prices.
In turn, an EMA reacts faster to price changes than a SMA. The below chart features both a 14 Period EMA (GREEN) and SMA (RED). One can quickly identify that the “reaction time” for the EMA is greater than the SMA. The EMA hugs the price action much closer & is more sensitive to changes in the market.
This quicker reaction time can provide traders with an advantage in quicker trend identification. Conversely however, it can also lead to more false signals. Savvy technical analysis tend to utilize both an EMA and SMA in conjunction to get the best of both worlds.
Every download of NinjaTrader features the SMA & EMA indictors, plus many more! Download NinjaTrader for FREE today and explore its technical analysis indicators, drawing tools, strategy building & back-testing capabilities!