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Chapter 11, Part IV. Which one is better – EMA or SMA?

Discussion in 'Complete Trading Education- Forex Military School' started by Administrator, Jun 21, 2011.

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  1. Administrator

    Administrator Just Administrator :-)

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    Part IV. Which one is better – EMA or SMA? [​IMG]
    Pipruit: So, Sir – which one?​

    Commander in Pips: You’ve asked a very good question, son. Please, tell me, when you find out the answer. He-he-he

    .
    Pipruit: That’s not funny…​

    [​IMG]

    Commander in Pips: Yep, it’s a very big pity.(*snortle*… he-he-he).

    Commander in Pips: Ok, son, let’s move through this question gradually, ok? We’ve estimated two different qualities of EMA and SMA:

    1. EMA calculation algorithm points more weight to most recent price action, while SMA algorithm points equal weight to closes prices of all periods.

    2. EMA has more dexterity and faster reacts more rapidly to changing general market sentiment and price action, while the SMA is slower.

    These facts lead us to conclusion that SMA has more fluent behavior, hence it better smooths out different fake outs and extraordinary splashes on the market. The EMA is vice versa - it taking into consideration different moves faster, and reacts faster to those. I think that we can make the followed conclusion:

    1. If trade short-term you prefer, and are interested to saddle the trend fast, the better choice for you EMA will be. (Look, I’m talking like Yoda, heh.) (Editor note: Like Yoda you are speaking yes. The forex force runs strong in your family.) You will recognize the trend faster than if you use SMA, hence, you will be able to enter earlier. The major unwelcome scenario here is that you could be stopped out in a case of fake outs and unnatural spikes, splashes and so on. Because the EMA reacts faster on most recent price action – sometimes it could show you that the trend has shifted already, so will have to exit, may be even with a loss. But then, the market could continue its previous move in your trade’s direction.

    2. In the meantime, if you prefer to trade on longer time frames – then using SMA will be better choice due to its smoothness. Since, on long-term periods, the trend could last during long time, the fast recognition will not be so crucial for you. What you do really want is a smooth move and weak reaction on different occasional splashing, because they do not change the overall trend – and that is particularly what you need. The major disadvantage with SMA is that it could show solid delay after trend starts, so you may miss an attractive entry point.

    So, as you can see, both of them have advantages and disadvantages.

    Pipruit: Hm, I do see this. But what will be the answer?​
     
    #1 Administrator, Jun 21, 2011
    Lasted edited by : Mar 11, 2016
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