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Simple vs. Exponential Moving Averages

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You’re probably wondering which is superior at this point.

Is it better to use a simple or exponential moving average?

To begin, we’ll look at the exponential moving average.

A short period EMA is the ideal way to go if you want a moving average that will respond to market activity rapidly.

These can help you catch trends very early (more on this later), which will result in higher profit. In fact, the earlier you catch a trend, the longer you can ride it and rake in those profits.

The downside of using the exponential moving average is that you might get faked out during consolidation periods

Because the moving average responds so quickly to the price, you might think a trend is forming when it could just be a price spike. This would be a case of the indicator being too fast for your own good. With a simple moving average, the opposite is true.

When you want a moving average that is smoother and slower to respond to price action, then a longer period SMA is the best way to go.

This would work well when looking at longer time frames, as it could give you an idea of the overall trend.

Although it is slow to respond to the price action, it could possibly save you from many fake-outs.          

The downside is that it might delay you too long, and you might miss out on a good entry price or the trade altogether.

An easy analogy to remember the difference between the two is to think of a hare and a tortoise.

Simple vs. Exponential Moving Average.   

The tortoise is slow, as the SMA, so you might miss out on getting in on the trend early.

However, it has a hard shell to protect itself, and similarly, using SMAs would help you avoid getting caught up in fakeouts.

On the other hand, the hare is quick, as the EMA. It helps you catch the beginning of the trend but you run the risk of getting sidetracked by fake outs.

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