It’s important to note that there are different types of moving averages. However, Simple Moving Average (SMA) and Exponential Moving Average (EMA) are two of the most popular. In this article, we’ll discuss the pros and cons of EMA vs SMA day trading, and which one of the two to use for long-term and short-term trading.
How to Choose Between EMA and SMA?
Traders need to understand the EMA and SMA difference in order to make the right moves. For example, your trading strategy and time frame should determine whether you use SMA vs EMA for day trading. This means using SMA for long-term trend analysis and EMA for short-term analysis.
The level of responsiveness from the moving average is also important. EMA is more responsive to recent price action, which makes it best for day trading. However, SMA is more stable and less sensitive to short-term fluctuations, so suitable for longer trading periods.
The above SMA EMA difference lies in the sensitivity each one shows in response to changes in the data used for calculations. SMA calculates the average price data. On the other hand, EMA gives more weight to current data. The newest price data impacts the moving average more, with older price data having a lesser impact.
Understanding Simple Moving Average (SMA) in Day Trading
To further understand the difference between SMA and EMA, let’s look at each of them individually. The Simple Moving Average (SMA) as an analysis tool cleans up price data by producing a consistently updated average price.
This average is from a predetermined timeframe that can be anything from 30 minutes to 30 weeks.
To calculate the SMA, add up the closing prices of the chosen timeframe, and then divide by that timeframe.
Understanding Exponential Moving Average (EMA) in Day Trading
EMA is similar to SMA, however, it gives more weight to the most recent prices. That’s why day traders prefer it over SMA. To calculate the EMA, take the moving average of a certain number of timeframes and then give more weight to the most recent price. This is what makes it more responsive to recent price changes than the SMA.
Because the emphasis is placed on the most recent price, day traders prefer EMA. It helps with quick trading decisions based on the most current trends.
The Benefits and Drawbacks of Using EMA and SMA
Now that you have an idea of the difference between EMA and SMA, let’s focus on each one’s benefits and drawbacks.
Benefits and Drawbacks of Using EMA
It’s a lot more responsive to recent price changes, which makes it ideal for identifying short-term trades and trading opportunities. However, it can be volatile and sensitive to short-term fluctuations and so, may provide false signals.
Benefits and Drawbacks of Using SMA
Its simplicity and stability make it beneficial for identifying long-term trends. However, SMA reacts slower to price changes. This makes it unsuitable for day trading.
When to Use EMA vs. SMA for Short-Term vs. Long-Term Trading Strategies
As mentioned earlier, EMA works best for short-term trading strategies. That’s because of how quickly it responds to recent price changes.
You’re better off looking at time periods of a few days to a few hours for day trading strategies. So, if you’re a day trader weighing 200 EMA vs SMA over the same time frame, make sure to put more weight on the latest price changes.
On the other hand, SMA is much better suited for long-term trading. It reacts much slower to price changes, so it’s suitable for getting a longer view of price movement trends.
Therefore, if you’re looking at a 200 SMA vs EMA, it’s much better to pick the SMA for swing or position trading. It’ll help you identify long-term trends and potential entry and exit points.