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

Which is better, EMA or SMA? - Forex School

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…​

Two different qualities of EMA and SMA - Forex School
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?​

Commander in Pips: Well, can you answer – which car is better – a Porsche 911 or a Lincoln Continental? You can ask a reasonable question – for what purposes will you use it…

So, here is the same. All markets and even different pairs on Forex have different nature, breathe etc. You can see that by different volatility, for instance. Many professional traders spend a lot of time to studing markets and to find the most suitable parameters for an MA among the different types of MAs as well. And all this stuff they apply precisely to their own trading style. That’s why even on the same market two different traders may use with equal success absolutely different parameters for MA. Here is a simple example for you. One trader trades short-term and uses a 3-period SMA, and another one – long term and uses, say, a 25 period EMA. The first trader makes 20 trades per month and second one – 2 trades. But the effectiveness could be almost equal. So, can we say that a 3-period SMA is better than a 25-period EMA? Of course not - if they will exchange MAs with each other, then nobody will be able to make profit.

What does it mean? When you will start to form your own trading strategy and suddenly find out, that trading with MA is a best way for you – you will have to spend a lot of time to estimate which type of MA to use, which period to use what market or Forex pair to choose and so on. By the way, the same is with any other indicator…

In general, many traders use several different MAs on chart. They use a slow (with longer period) SMA for the overall picture, and could use a fast (with shorter period) EMA to determine the entry or exit point.

Pipruit: I see. Thanks, Commander. But still, will you tell me something more interesting about MAs?
Commander in Pips: Yes, we will discuss interesting parameters for MAs – forward displacing, but not in this part. Here I just want to point some thoughts from my own experience:

1. I do not see any big advantage of EMA compared to SMA in real application and vice versa. Although the theoretical basis, that we’ve discussed exist. Hence, according to my rule to keep all as simple as possible I use SMA;

2. If we say “fast” MA – it means that MA has a lower period number and if we say “slow” MA – then it has a longer period number.

3. I suppose that Displaced simple moving averages the most suitable for using on real market. And I offer you to start with them in the next part of this chapter.

Comments

Obi Wan Bakari
7 years ago,
Registered user
Haha the reference to Yoda tickled me!

I quote
"the better choice for you EMA will be. (Look, I’m talking like Yoda, heh.)"
Hamza Samiullah
2 years ago,
Registered user
Nice Explanation...
One-fm
8 months ago,
Registered user
Thanks

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