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Long term EMA vrs SMA

I have used the SMA and EMA in charting and in the short term time frame they are usually pretty close to each other. I recently conducted some longer term scans using the SMA 150 using and plotted a chart. For comparison, I plotted both the SMA 150 and the EMA 150 on the same chart and was amazed as to the difference between the SMA and the EMA over 150 days. It appears that on a shorter time frame the SMA and EMA are fairly close to each other. However on a longer time frame, there can be quite a divergence. Why is that and with a longer time frame of say... 150 days, which EMA is more representative to determine the trend?
Thanks,
JJJJ

Comments

  • markdmarkd ✭✭✭
    SMAs give equal weight to each number in the series used to calculate the average. Some people object to this because they feel that older prices are less relevant than recent prices.

    EMAs get around this problem by front weighting the numbers, so the the more distant the number the less it counts for in the calculation - that is, instead of using the entire value of older numbers, a decreasing fraction of the older numbers is used to calculate the average.

    In a short EMA, the difference in weighting between the front end and the back end of the series is not that great. However, the longer the EMA, the more that difference grows.

    EMAs stay closer to prices, so price penetrates them sooner, which some people consider a signal. Also, EMAs themselves turn faster. Some people take that as a signal. Likewise, if you consider crossovers a signal, two EMAs will cross sooner than two SMAs.

    Which is better? It depends on your trading style, the kind of market we are in and the kind of stock you are in. EMAs work best when the market is trading "smoothly" - when it goes up, it goes up for a while, and when it goes down it goes down for a while. But if the market gets choppy, or ranges or is otherwise erratic, the EMA will give more "false" signals because it hugs prices too closely. SMAs will usually get you in or out later, so you miss the first part of the trend, lose the last part, but you will get whipsawed less.
  • JJJJJJJJ
    OK..Thanks. I think I will use both MA's, depending on the volatility of the market and of a particular stock.
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