Below, we’ll break down the difference between EMA vs MA. We’ll do this by giving a thorough explanation of each analysis type. Then, to finish off, you’ll get information on the functions of MA vs EMA for day-to-day trading.
What is a Moving Average (MA)?
Traders use the moving average (MA) as an indicator in technical analysis to help them identify trends by smoothing out short-term price fluctuations. The basis of calculation is on taking the average of a security’s price over a specific period of time. Traders then plot that average as a line on a price chart
The most common time periods for calculating moving averages are 10, 20, 50, and 200 days. An MA calculation involves adding up the closing prices for a security over a specified number of days. The total then gets divided by the number of days.
There are different types of moving averages. These are simple moving averages (SMA). The SMA will be referred to as the MA in this article since there’s no difference between the moving average vs simple moving average. And then, there are the exponential moving averages (EMA), which will be discussed a little later.
It’s important to note that Moving Averages are a lagging indicator. Meaning they respond to the trend changes after they happen and can offer a delayed signal. Therefore, traders often use other indicators or chart patterns to confirm any signals generated by moving averages.
What is an Exponential Moving Average (EMA)
An exponential moving average (EMA) is a type of moving average that places a greater weight and significance on the most recent data points. The weighting applied to the most recent data points reduces as the observations in the time series get older.
This helps to reduce the lag in the indicator, making it more responsive to recent changes in the data. Therefore, the EMA helps to identify short-term price trends during the technical analysis of financial markets.
To calculate the EMA, apply a weighting factor to the most recent closing price. But the weighting factor should be based on the number of periods in the moving average. The formula for the EMA is: EMA = (Closing Price – EMA(previous day)) x (2 / (Time periods + 1)) + EMA(previous day).
Where the “closing price” is the most recent closing price. Then, the “EMA(previous day)” is the previous day’s exponential moving average. And finally, “Time periods” is the number of periods used to calculate the moving average (e.g., a 20-day EMA uses 20 periods).
When you compare EMA vs MA, you’ll find that the exponential moving average gives more weight to recent prices. Therefore, it’s more responsive to new information.
What is the difference between MA vs EMA?
The calculation methods used are the main difference between MA and EMA. A moving average (MA) is calculated by taking the average of a set of data points over a certain period of time For example; a 10-day MA would be the average closing price of a stock over the last 10 days.
There’s equal weighting for all data points used in MA calculation. This means that each data point carries the same weight in the average. It gives a level playing field for calculating trading trends during that time.
On the other hand, we have the exponential moving average (EMA). This time, there’s a greater weight and significance on the most recent data points. There’s less emphasis on the importance of older data points. However, they may be considered for giving a wider picture of what’s happening.
The weighting factor used in the EMA calculation gets based on the number of periods in the moving average. In addition, it decreases exponentially as the data points get older. This helps to reduce the lag in the indicator and make it more responsive to recent changes in the data.
EMA has a fast track for responding to recent price changes compared to MA. That’s the reason it’s so popular among traders. However, it doesn’t define a trend change by itself. Traders combine EMA with other indicators and then make a decision to buy or sell.
In summary, an MA gives equal weight to all data points within the time period, and thus, the reaction time to a price change is slower. While EMA gives more weight to recent data points, and thus the reaction time is faster.
Functions Of Moving Average And Exponential Moving Average
Now that you have a good understanding of EMA vs MA, let’s take a look at how they can impact the process of trading. Some main functions of moving averages and exponential moving averages are:
- Identifying short-term trends: Traders can smooth out fluctuations in the price data and highlight the underlying direction of the trend.
- Generating buy and sell signals: A buy signal gets generated when a shorter-term MA or EMA crosses above a longer-term MA or EMA. This indicates that the short-term trend has risen above the long-term trend and that the stock may be trending upward. Conversely, when the shorter-term MA or EMA crosses below the longer-term MA or EMA, there’s a signal to sell. This indicates that the short-term trend has fallen below the long-term trend and that the stock may be trending downward.
- Identifying support and resistance levels: Both MA and EMA can also be used to identify levels of support and resistance. A visual representation of where the stock price has struggled to break through in the past does this well.
- Finding overbought and oversold conditions: When the stock is trading at a high relative to its moving average, it can be considered overbought. But, when the stock is trading at a low relative to its moving average, it can be considered oversold.