In contrast, fundamental analysis is favoured by long-term investors. This form of analysis uses past security price patterns to predict future price movements. Technical analysis is mainly used by short-term traders in strategies such as day trading. However, like the SMA, most charting software available will draw an EMA line at the click of a button, including our online trading platform, Next Generation. Calculating the EMA is more complicated than the SMA. The EMA is more responsive to the latest data than the SMA, because the latest data has a larger impact on the calculation. This is the key difference between the SMA and EMA. In comparison to the SMA, the exponential moving average gives more weight to the most recent prices. As a result, some traders and investors prefer to use another form of moving average, known as the exponential moving average (EMA). They argue that current data is more important than previous data and should therefore have a higher weight. ![]() Some traders and investors believe that it is flawed because every data point has the same weight. ![]() While the SMA is a very popular technical indicator, it does have one main weakness. It is calculated by adding up past data points and then dividing by the total number of data points. The simple moving average is the simplest type of moving average. This method can be used across many markets, including foreign exchange, indices and stock markets. This can also be helpful in identifying trend changes. For example, a security in a long-term uptrend may continually pull back a little, but find support at the 200-day SMA. Often, during a trend, the SMA will provide a dynamic level of support or resistance. They can also be used to identify support and resistance levels. Simple moving averages can be useful in spotting trend changes. By analysing the SMA, the investor or trader can quickly assess market trends and determine whether the security is trending upward or downward. In contrast, a security trading below its 20-day SMA is thought to be in a long-term downtrend. For example, a security trading above its 20-day SMA is thought to be in a short-term uptrend. The basic rule for trading with the SMA is that a security trading above its SMA is in an uptrend, while a security trading below its SMA is in a downtrend. At a very basic level, traders and investors use the SMA to assess market sentiment and get an idea of whether the price of a security is trending up or down. A down trending market making lower swing highs and lows that then makes a higher high indicates a change in trend with a pending good buying opportunity.There are two main ways to use the simple moving average. For example, an up trending market making higher swing highs and lows that then makes a lower low indicates a change in trend with a pending good selling opportunity. So key points are to look for this structure, and more importantly, when the swing structure reverses. It is the trend of these highs and lows that matter, with a down trend defined as consecutive swings with lower highs and lower lows, and an up trend defined as consecutive swings with higher highs and higher lows. One can define the swing highs and lows by using something like Williams' Fractals. I don't care at all about opening and closing prices, just the price extremes. Price action and swing analysis is focusing on the highs and lows of swings on some time frame, or in my case, on multiple time frames. I use day, 12 hour, and 6 hour charts for futures, as most futures trade almost around the clock. For your 1 week or less type trading, I'd probably use a 1 or 2 hour period for stocks, and 4 or 6 hour period for futures. ![]() I would not use moving averages for trade entry or exit, that is not what they are for. For that, I'd suggest a Hull moving average, and using 3 exponential moving average of 8, 13, and 21 periods (also known as Slim Ribbons). The only use for moving averages is to display momentum. I focus on price action and swing analysis. What period are you averaging? Days, weeks, hours, minutes?Įndless number of considerations, which do you use?Īs a technical trader with 35 years experience, I chucked these all years ago. Then which value are you averaging - close, highs, lows, midpoints, etc.ĭo you plot 1 average of the highs and 1 of the lows? or just the closes with a percentage envelope? There many types - simple, weighted, exponential, variable, Hull, smoothed, etc.
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