Some of the most popular technical indicators in trading are EMA and SMA both used for finding entry and exit positions. In case you were wondering which one you should use, it will depend on your strategy. But do not worry! I’ll tell you the main advantages of each indicator, so you can easily choose when to use one between EMA vs SMA. 

Technical indicators are tools that help you better understand the behaviour and price movements of the securities for finding better selling and buying opportunities. There are many indicators; some will help you understand the price’s volatility, others the volume of transactions, and some, like SMA and EMA, identify trends. 

Keep on reading to learn all about EMA and SMA, their main differences, and the benefit of using each type of indicator. This will allow you to  decide which one you should include in your strategy.

What is a Moving Average?

Moving average (MA) is a technical indicator used for understanding the price data over a specified period. It creates an updated average price by taking the data over a specific number of days in the past.

As an investor, you can customize the time frame for the moving average you want to calculate. The most common periods are 15, 20, 30, 50, 100, and 200 days. 

You may choose various periods of different lengths based on your trading objectives. For example, if you are going to make a short-term trade, you can use a shorter moving average, and if you want to make a long-term trade, the best suited is the long-term moving average.

How to Calculate Moving Average? 

To calculate a moving average you need to add up all the price data during a specific period, then divide the result by the number of periods.

For example, this is the Moving Average Formula of 10 days.

1) Add up the ten security prices of the last days:

$10 + $12 + $11 + $10.5 + $10.3 + $12 + $11 + $13 + $10.3 + $12 = $112.1

2) Divide the result by the number of days: 10.

MA: $112.1/10 =$11.21

It is a “Moving Average” because this calculation is constantly moving by updating the average with the last price of a stock. Following our example, on the next day, a 10-day moving average would take out the oldest price ($10), and make a new calculation with the most recent price of a stock.

What is EMA? 

EMA means Exponential Moving Average, and is a moving average calculated by giving more weight to the recent prices of a stock.

The intention of the anterior is that by doing so, EMA would be more responsive to quicker movements of trends. That’s why it emphasizes the more recent price activity more than the older activity. For this reason, it is an excellent tool for a short-trading strategy and if you want to find a trend earlier.

How to Read EMA Indicator? 

To read the EMA indicator you need to place it in your graphic and observe how it follows the price’s trend. 

The objective of this indicator is to help you establish the direction in which the price of a financial asset is moving based on past prices. Remember that this indicator isn’t giving you a prediction, it shows you the trend that followed.

What is SMA in Stocks?

SMA means Simple Moving Average, and is an indicator that calculates the average price of a stock in a certain period that is constantly updating.

You can use it to follow trends’ prices in long-term trades because it gives you an idea of the overall trend. The rising moving average indicates an uptrend, and the declining moving average indicates a downtrend.

How to Use SMA Indicator? 

To use an SMA indicator, you should consider if you are looking for long-term trades because the response of this indicator is slow and has some lag in it. This is not necessarily a bad thing; because it can help you be more certain about a price trend.

What is the Difference Between SMA and EMA?

The main difference between SMA and EMA comes in the speed of response; EMA is considered faster than SMA. It is all because EMA is more weighted to the recent price, and SMA is a simple average of past prices.  

The speed of response is also the reason that SMA is considered for long-term trades and EMA for short-term trades.

As you can see in the next graphic, we have the EMA (red line) and the SMA (blue line), and both indicators are following the trend price of the Tesla’s Stock. The behavior is very similar and there are subtle differences, but you will notice that EMA is closer to the price, this is because it reacts quicker to the trend movements.

EMA and SMA in the same operation.

How is EMA and SMA Calculated?

It is complex to calculate the EMA indicator, although most trading platforms will help you do it. But if you want to see how is calculated, here is the formula: 

EMAt​=[Vt​ × (s/1+d​)]+EMAy × [1−(s/1+d​)]

Where: 

EMAt​=EMA today

Vt=Value today

EMAy=EMA yesterday

s= Smoothing

d=Number of days​

The formula for calculating the simple moving average of a financial asset is:

SMA=(A1+A2+…+An) / n

Where:

A=Average in period n

n=Number of time periods​

Even if it’s important to know how these indicators are calculated, you should know that all trading platforms will do it automatically for you and place them in your graphics for your technical analysis. 

The Benefits of Using Each Type of Indicator 

EMA will help you find trends quicker for selling or buying opportunities, but that quick response also can be counterproductive, because there are possibilities that the trend changes once you place a market order.

On the other hand, the SMA moves slower and helps you avoid the risk of quick changes in trends; you can be more certain about some buying and selling opportunities; the disadvantage comes when you can lose some opportunities to join trends at the right time.

How to Choose the Best Indicator for Your Trading Strategy?

Consider the time frame of your trades, that will be the most important aspect when you want to know which indicator you should use.

Remember that these are some of the tools that exist in trading to help you analyze the financial markets. This will not guarantee your success in trading, you should complement your strategy with other indicators and tools. 

That is one of the reasons why at MDC Trading Academy we created a program to develop professional traders by teaching them all the necessary skills to have a successful career. I invite you to join our Senior Trading Program to learn about technical analysis, trading psychology, and more!

FAQ

Which is Better SMA or EMA?

The best indicator will be the one that suits your trading strategy. Both indicators are useful for their own purpose, and it depends if you are a long-term or a short-term trader.

Do More People Use SMA or EMA?

Most traders use both indicators; you should find the right moment to choose one over the other.

Can you Use EMA and SMA Together?

Yes, you can. Remember that you should not exclude one financial trading tool from another. You can use most of it as a complement to give more certainty to your analysis.

What are the Best Moving Averages for Day Trading?

The 10-period moving average is one of the most used in Day Trading.

What is the Most Accurate Moving Average?

The accuracy of a Moving Average depends on the type of trade and obeys different purposes.

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EMA vs SMA: When You Should Use One Over the Other?

by | Jun 3, 2022 | Uncategorized | 0 comments