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Moving Averages 101: Simple Moving Average vs. Exponential Moving Average

technical analysis indicators sma ema moving average

Technical analysis is the study of price, volume and chart activity to help predict future market moves. Traders who utilize technical analysis operate under the premise that history repeats itself.

In other words, the use of technical analysis approach assumes that price movements follow consistent historical patterns. As a result, finding such patterns may help to determine future price movements.

Technical Indicators

Technical analysis traders use various tools and approaches to track opportunities in the markets. Sometimes referred to as “chartists,” technical analysis traders seek price reversals or continuations based on their specific methodologies. The most common tools used by tech traders are technical indicators.

Also known as “studies” or “chart studies,” technical indicators use mathematical calculations to identify patterns or predict future price moves.

Moving Averages: A Foundation of Technical Analysis

Among the most commonly used technical indicators are moving averages. Referenced in some form by most chartists, moving averages are commonplace in the world of technical analysis. They are also the building blocks of many other indicators which take the calculations of moving averages and build upon them.

Certain moving averages are so widely followed that they are used as benchmark price levels. For example, the 50, 100 and 200-day simple moving averages often act as support and resistance levels themselves. Some speculators have even suggested that technical analysis is a self-fulfilling prophecy in this regard which has been the cause of much debate.

SMA vs EMA: Which to Use?

The most basic form of a moving average is a simple moving average (SMA) which calculates the average price over a specified period. It is called a moving average because it plots on the chart bar-by-bar as time elapses.

An exponential moving average (EMA) places a higher weight on recent data than older data. Recent price action has a greater impact on EMA values which therefore react more quickly to price changes than SMAs. Generally speaking, EMAs are used to track shorter-term market moves and SMAs are used to monitor longer-term trends.

sma ema chart technical analysis cross

In the top panel of the chart above, daily trading activity for WTI Crude Oil Futures (CL) is displayed with a 50 and 200-day SMA plotted over the price bars. In the bottom panel, the same price data is displayed with the 50 and 200-day EMAs for comparison.

As you can see, the crossover of the 200 above the 50 EMA occurred a few days before the SMA (upper panel), demonstrating the faster-moving nature of exponential moving averages. The SMA lines in the upper panel are also smoother than the more reactive EMA lines below.

Learn how to identify trends using the EMA & SMA in this quick video:

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