SMA VS EMA EXPLANATION
Already have trading experience, you must have used the Moving Average indicator, right? But do you know that there are various kinds of moving averages? There are SMA and EMA indicators. Which one is better? The analogy, such as gears, Moving Average has several modes that can be changed to suit market conditions. Well, so that technical analysis is sharper, you should study the mode comparison of the Moving Average (MA).
Types of Moving Averages
In its development, the Moving Average indicator has many varieties, but only two of the most popular types, namely:
Simple Moving Average (SMA)
The SMA indicator is the default setting of the Moving Average. That is, when you first use the Moving Average indicator, generally the trading terminal will display SMA as the first choice (base). So most likely, novice traders will get used to using the SMA indicator rather than other variants.
As the name suggests, the SMA indicator displays a visual line that is formulated from a simple average calculation. The calculation only inputs a list of prices (from the highest, lowest, opening, or closing prices), then divided by how long the period is determined, for example as in the following example:
Exponential Moving Average (EMA)
The EMA indicator is the second most popular variant after the SMA indicator. Generally, traders use this mode to anticipate volatility on low timeframes, especially during high impact news releases.
In contrast to the SMA indicator, the EMA uses a formulation where the price on the last candlestick is more influential. The purpose of the formulation is to provide "encouragement" so that the EMA line is more sensitive to price changes. So for example the steering wheel on a car, the EMA indicator "cranks" faster than the SMA indicator.
SMA and EMA Indicators Comparison
It should be noted that this comparison is not aimed at finding the best indicator in all situations. You see, each of these indicators actually have advantages and disadvantages. More precisely, each of these indicators will be more effective if used in certain situations.
To make it clearer, let's check the details one by one:
In what situations is the SMA indicator more effective to use?
The SMA indicator lines generally move rather slowly (lagging) following the latest price changes, so at first glance the line looks away from the latest price point. Because of this, the SMA indicator is more effectively used as a support and resistance boundary line, or a marker for price bounces. For example like the example below:
From the picture above, it is clear that the 50 period SMA indicator works better than the same period EMA as a dynamic support and resistance line.
For this reason, the SMA indicator is more useful when used on high timeframes and periods. Investors and analysts will generally use SMA with a period of 50 and above (100 and 200) on the Daily (D1) timeframe to assist their technical analysis process.
Next, under what circumstances is the EMA indicator more effective to use?
The line on the EMA indicator responds more quickly to price changes. In other words, the EMA line will appear more flexible following the latest price movement than the SMA indicator line. Because of these factors, the EMA indicator is more effectively used as a trading signal, especially for short-term trading on small time frames.
One of these trading signals is the intersection between two or more Moving Average (MA Crossover) lines. Examples are as follows:
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The image above shows three EMA lines with different periods. Trading signals on the EMA indicator are triggered faster than the SMA indicator because the lines on the EMA are more responsive to price changes. In other words, if you don't want to be late in placing a position, use the EMA, if you use SMA it will be too late.
Conclusion
In general, it cannot be said that the SMA indicator is better than the EMA, or vice versa. Each of these indicators has a specific formulation, where the results will be more optimal if used in the right situation. Therefore, study and try both variants of the Moving Average. After that, decide which one is the most suitable for your needs and trading style.