In looking at the two types of moving averages, you can come to a very simple conclusion: use what works best for you.
Each can be used to produce successful trades, and some strategies require that you use both exponential and simple moving averages.
In general, we can look at the moving averages broadly to come to some conclusions:
- SMA – The simple moving average is slower to catch onto new trends, and may often throw false signals because the moving average doesn’t weigh recent activity to the same degree as an exponential moving average. By the time the SMA catches on to a trade, you might already be too late to make a profit!
- EMA – The exponential moving average is faster, more likely to look like the currency pair chart, but can also throw false signals because it is affected greatly by short-term changes in the price of a currency pair. The EMA may give a trading signal that is a false one because it is so quick to respond, costing you money!
A simple moving average, since is moves slowly, is more likely to generate buy or sell signals further through the changing trend than an exponential moving average. However, in some cases, the SMA is playing it smart and keeping you from the overexcited EMA, which is telling you to make a trade.
The opposite may be of interest for you with the EMA. The EMA is much more responsive to trading signals, and may encourage you to enter a trade early to ride it for the longest possible profit. Of course, it may tell you to enter a trade too early, also!
At any rate, we’re going to explore further how you can use the SMA and EMA to generate trading signals. Each is excellent for determining:
- Support and resistance
- Changing trends
- Confirmation of other technical trading signals.
Continue on to our next lesson on how you can make money in forex with moving averages.
