Simple Versus Exponential Moving Averages

Notice that the price was still above the purple line long-term , so no short position should have been taken.

The day moving average is rising as long as it is trading above its level five days ago. 

Longer moving averages are like ocean tankers - lethargic and slow to change. This is considered a bearish signal, that further losses are in store.

Calculate EMA with VBA 

Moving average 1, the blue line, is a fast moving average because it uses fewer data points, or a shorter time period in its calculation. Moving average 2, the red is a slow moving average because it takes a larger sample of points and therefore has a slower reaction time to changes in price.

For example a 10 period SMA has 10 inputs. A 20 period EMA has 20 inputs. The difference lies in the weighting of the inputs. By contrast, an EMA gives more weight to recent price inputs, with past price inputs counting for less and less of the final average as time goes on.

For example, in a 10 period EMA the most recent input price 10 counts for So again, the key difference is the SMA weights all price inputs equally and the EMA gives greater weight to recent price inputs.

So which is better? While much depends on the period a trader chooses, an SMA will not turn as quickly as an EMA of the same time period with the same number of inputs. So choosing one over the other depends on what it will be used for. They can both be very useful when trading Nadex binaries and spreads, as a signal to exit a binary or spread prior to expiration, but choose the faster moving EMA if you struggle emotionally while you are in trades, and the slower SMA if you prefer to hold until expiration.

As with all trading advice, control your risk, get educated and then do your own research before implementing anything new into your strategy. In , Bob began teaching his techniques to the public. In , Bob and his trading partner, Mike Arnold launched Path Trading Partners to continue teaching their trading strategies and launch an international proprietary trading group.

In addition to the disclaimer below, the material on this page is for informational and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Please note, exchange fees may not be included in all examples provided. Conversely, when the simple moving average crosses beneath the simple moving average, it creates a death cross.

I only mention this, so you are aware of the setup, which may be applicable for long-term investing. Since Tradingsim focuses on day trading, let me at least run through some basic crossover strategies. For example, 10 is half of Or the 50 and are the most popular moving averages for longer term investors. The second thing is coming to understand the trigger for trading with moving average crossovers.

A buy or sell signal is triggered once the smaller moving average crosses above or below the larger moving average. Isn't that just a beautiful chart? The period SMA is the red line and the blue is the period. Selling a Cross Down Let's look when a sell action is triggered. Now in both examples, you will notice how the stock conveniently went in the desired direction with very little friction. Well, this is the furthest thing from reality. If you look at moving average crossovers on any symbol, you will notice more false and sideways signals than high return ones.

This is because most of the time stocks on the surface move in a random pattern. Remember people, it is the job of the big money players to fake you out at every turn in order to separate you from your money. With the rise of hedge funds and automated trading systems, for every clean crossover play I find, I can probably show you another dozen or more that don't play out well. This again is why I do not recommend the crossover strategy as a true means of making money day trading the markets.

Simple Moving Average Trading Strategy Case Study Using Cryptocurrencies If you have been looking at cryptocurrencies over the last 6 months, you are more than aware of the violent price swings. So, it got me thinking. Are there any indicators that can give a trader an edge, or is bitcoin so volatile that in the end, everyone loses at some point if you try to actively trade the contract?

This is where I got the bright idea to see how the SMA would hold up against bitcoin. For this study, I am using the golden cross and death cross strategies, which consists of the period and period simple moving averages. For those of you not familiar with these strategies, the goal is to buy when the period crosses above the period and sell when it crosses below.

To make things more interesting, the study will cover the minute time frame, so we can get more signals. The study will start on January 26th, and run through March 29th, As you can imagine, there are a ton of buy and sell points on the chart. Now, to be clear, I am not a fan for always staying in the market, because you can get crushed during long periods of low volatility. First Trade Signal The first trade was a short at 10,, which we later covered for a loss at 11, Herein lies the problem with crossover strategies.

If the market is choppy, you will bleed out slowly over time. Will you Really Take Every Trade? Second Trade Signal I ask this question before we analyze the massive short trade from 10, down to 8, A challenging part of trading is you must trade every time your edge presents itself. That move down is beautiful and you would have reaped a huge reward, but what is not reflected on this chart are there a number of whipsaw trades that occurred prior to the 26th of January.

Do you think you have what it takes to make every trade regardless of how many losers you have just encountered? Oh, how I love the game! Herein lies the second challenge of trading with lagging indicators on a volatile issue. By the time you get the trade signal, you could be showing up to the party late.

Third Trade Signal The next move up is one that makes every year-old kid believe they have a future in day trading - simply fire and forget. If you go through weeks of trading results like this, it becomes difficult to execute your trading approach flawlessly, because you feel beaten down. Due to the volatility of bitcoin, it's apparent that your gainers are far larger than the losers.

In Summary Much to my surprise, a simple moving average allows bitcoin to go through its wild price swings, while still allowing you the ability to stay in your winning position. The below infographic visualizes the details of this case study.

My Personal Journey Day Trading Simple Moving Averages Now that you have all the basics, let me walk you through my experience day trading with simple moving averages. Tweet Tweet You could be saying to yourself, "Why do I care about this guy's experience? Mine will be different? In my mind volume and moving averages were all I needed to keep me safe when trading. I read all the books and browsed tons of articles on the web from top "gurus" about technical analysis.

From what I could see, price respected the period moving average "all" the time. I didn't know at this point you see what you want to in charts and for every winning example, there are likely dozens that failed.

If the stock closed below the simple moving average and I was long, I should look to get out. But, if the stock could stay above the average, I should just hold my position and let the money flow to me. Riding the Simple Moving Average I'm not even going to worry about giving you the ticker of the above chart because it's honestly irrelevant. The point is that I just saw hundreds and I mean hundreds of charts with this pattern.

The pattern I was fixated on was a cross above the period moving average and then a rally to the moon. I remember feeling such excitement of how easy it was going to be to make money day trading this simple pattern. Now, shifting gears for a second; anyone that knows me knows that I have a strong analytical mind. I will review the numbers and then run them all over again to make sure everything nets out. Hence my second phase on this journey.

I am placing some trades and trying different systems, but nothing with great success. I am using the period simple moving average in conjunction with Bollinger Bands and a few other indicators. It's not quite a spaghetti chart just yet, but it's a little busy. So, after reviewing my trades, I, of course, came to the realization that one moving average is not enough on the chart.

The need to put more indicators on a chart is always the wrong answer for traders, but we must go through this process to come out of the other side. I felt that if I combined a short-term, mid-term and long-term simple moving average, I could quickly validate each signal.

Let's illustrate this strategy through the chart. You are welcomed to use any setting that works best for you, but the point is each moving average should be a multiple or two from one another to avoid chaos on the chart. I used the shortest SMA as my trigger average.

When it crossed above or below the mid-term line, I would have a potential trade. The sign I needed to pull the trigger was if the price was above or below the long-term moving average. So, going back to the chart the first buy signal came when the blue line crossed above the red and the price was above the purple line. This would have given us a valid buy signal. Then after a nice profit, once the short line crossed below the red line, it was our time to get out.

Did this mean we should have gone short? Notice that the price was still above the purple line long-term , so no short position should have been taken. The purple long-term prevents is from always being in a long or short position like in the cryptocurrency case study mentioned earlier. Looking back many years later, it sounds a bit confusing, but I do have to compliment myself on just having some semblance of a system.

How do you think this all played out? Don't worry, I'm going to tell you now. That's what I was hoping to represent with the green smiley faces. The green also represents the expectation of the money flow as well. It's around late summer at this point and I was ready to roll out my new system of using three simple moving averages. It became apparent to me rather quickly that this was much harder than I had originally anticipated.

First off, it was tough trying to figure out which stocks to pick. Once I landed on trading volatile stocks, they either gave false entry signals or did not trend all day. This level of rejection from the market cut deeply.

 

Step 1: What is the best moving average? EMA or SMA? 

The exponential moving average in the spreadsheet starts with the SMA value () for its first EMA value. After the first calculation, the normal EMA formula is used. The formula for an EMA incorporates the previous period's EMA value, which in turn incorporates the value for the EMA value before that, and so on.

A simple moving average (SMA) is customizable in that it can be calculated for a different number of time periods, simply by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods, which gives the average price of the security over the time period. Exponential Moving Average (EMA) The exponential moving average (EMA) focuses more on most recent prices rather than on a long series of data points as the simple moving average required. 

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Simple Moving Average Calculation

Moving average 1, the blue line, is a fast moving average because it uses fewer data points, or a shorter time period in its calculation. Moving average 2, the red is a slow moving average because it takes a larger sample of points and therefore has a slower reaction time to changes in price. In financial applications a simple moving average (SMA) is the unweighted mean of the previous n data. An exponential moving average (EMA).

If someone asked me what tool it the most used on common charting platforms, I would guess its the moving average (MA). If the follow up question was “Which moving average?”, then I’d be. This is usually a simple moving average of length T. The chart above, for example, gives the EMA of Microsoft between 1st January and 14th January Technical traders often use the cross-over of two moving averages – one with a short timescale and another with a long timescale – to generate buy/sell signals.

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