Investing and trading styles determine the nature of the moving average, which is suitable for use. A simple moving average also abbreviated as SMA is an ‘unweighted mean’. The calculations involve the addition of closing price over a period divided by the total number of periods.
A short-term averages exhibit quicker changes in price, while long term averages exhibit a slower change in prices. SMA is effective when used over for long term average, as they are better for long periods. By increasing the sensitivity of an average, you can ensure to increase your accuracy in describing the event. Hence, SMA is an effective statistical tool to describe long-term events, as their sensitivity articulates with time increasing its accuracy.
An exponential moving average also abbreviated as EMA and also better known as EW (Exponentially weighted) MA (moving average) works by filtering weighting factors and hence, decreasing exponentially. Many forex traders believe that it is quite advantageous to make use of exponential average for estimating short periods to ensure capturing changes quicker than using SMA. Thus, Exponential moving averages are more sensitive over short-term changes and are used to study accurate changes in the short-term course evaluation of forex trading.
There are different opinions according to which moving average is more efficient compared to the exponential average, as both are altogether different ways of studying forex trading. Both are equivalently essential tools on which a forex trader relies. For shorter periods, it is ideal to choose SMA and for larger periods, it is wise to choose EMA. However, this does not settle the debate, as experts have indicated that studying slower responses of price over time can save traders from uncalculated risks. Thus, to ensure better authenticity over the evaluated report, one may choose to use SMA to study shorter intervals of price changes.
On contrary, delays can cause a trader to miss better trading opportunities. Hence, using SMA for studying price changes in short intervals can prove fatal to some traders, as they can lose trading opportunities due to the delay in time. Thus, it is often the relevance and importance of a trading nature that decides the type of moving average needed. Smaller trades involve smaller risks. Hence, it may be advisable to use EMA while studying shorter intervals, as they would give quick results saving on trading time.
It often depends on the trader to decide on whether to choose sensitivity over reliability or reliability over sensitivity. Better the sensitivity, quicker the results. However, a moving average giving quicker results is more probable of losing its reliability. Hence, the better the sensitivity, the lesser its reliability. Thus, it is advisable to calculate one’s need well in advance prior to choosing a moving averaging method. As reliability and sensitivity never go hand in hand, they are inversely proportional to each other. Hence, it is advisable to calculate the percentage of reliability and sensitivity needed before choosing a specific averaging method.
To conclude, it is often a trader’s call to choose between both, as both options have their own advantages.