EMA vs SMA; When to Use One Over the Other (Comparing Simple vs. Exponential Moving Averages)

in this video traders look at the difference between a simple moving average and exponential moving average but more importantly when we should use one over the other stay tuned

hey guys welcome to you thank you for joining me alright so i am in sea trader uh platform now uh really good platform really impressed with it the exposure i’ve had to it now via pepperstone they are our channel sponsor if you want to check them out the link in the description below uh they are sponsoring this video and i’m using ctrader they do offer mt4 as well

but i’m really quite going to like see traders a couple of little tools and options in it

um that make it an interesting proposition so i definitely would check it out

i’ve got a live account here we put some money in it just playing around with it getting used to

some of the functions and things and one of the things i kind of thought about was playing around with the indus with some of the indicators and what have you uh was kind of a simple moving average to exponential moving average debate this hasn’t been going on for ages you’re going to get people sitting in one camp people sit in the other and generally my approach to it it doesn’t matter too much but then actually

when you look at some charts it does matter there are some circumstances where it really matters

so let’s put up a simple moving average and go through a couple of different options so

i’ll go to indicators here put trend on we’ll put a simple moving average i’m going to show you a 20 to start off with and we’ll leave that as blue and then i’m going to put in an exponential here so we’re going to trend we’re going to exponential moving average and i’m going to set it as 20 i’m going to make this one red and keep that kind of standardized throughout so if you can see on a 20 period we don’t have that much difference majority of the time

if you look in this current scenario like i said i’ve got a daily chart of the dax up here

i’m in dark mode by the way uh in c trade which is a nice

a nice little addition you can you can flip quite easily

uh and and they’re pretty much the same you know you’ve got a little bit of differences but if you’re worrying about the fine and really minut differences you’re worrying about the wrong thing if you’re buying a pullback to a 20 period after a drive this kind of thing here let’s get the cursor on uh after across there sorry after a drive you know swings around about whether using smearing and ema

now just to kind of recap an exponential moving average adds more weight it’s not going to go into the intricacies of the formula go and check it out on google if you’re interested in geeking out on that i have done and it’s kind of really pretty interesting but it just cements really the fact that actually it takes more weight on current price so exponential

adds more weighting if you like to current price simple just literally takes an average you’ve got 20 period 20 day on the closing price 20 closing prices divided by 20

there’s a simple result and it plots it in a

line format adds to the adds to the plot as it goes to the next day

very very simple exponential adds a little bit more weight

to current price and so if you believe that current price has

more weight and i think it does in certain circumstances for sure then maybe an exponential is what you want to use now in this example of a 20 period we don’t get much variation we do when we get in this extreme scenario where the coronavirus lows here

as i’m calling them and we were ripping up like 1500 points in a couple of days um on the dax that’s a lot we’re getting a reasonable distance between the sm and the inmate don’t forget that’s a rare scenario guys you know if you go back and you look um let me just get the

arrow back on if you go back and look in the majority of the time throughout you know all of this period i’m scrolling back for very very very in line not much in it and you can almost argue that actually you know what

normal conditions it makes no difference and that’s my philosophy really i you know i don’t think there’s much difference if you’re using moving average to get involved in the first pullback type trade ema sma

doesn’t make any odds however now when you start to

go out on a longer time frame or are you trying to make the moving average longer 100 period 200 period you start to see some differences so let’s go in here into objects list indicators look at the simple moving average and let’s change it to 200 period

and let’s do the same with the exponential moving average exponential moving average 200 period reminding exponentials in red now see how much

wider we get under certain circumstances so

if you look um and actually happens quite a lot of the time because when you go back and when you look at uh scrolling back you can see how much wider things get in comparison to price you know this is a width now of a thousand points obviously it’s narrowing now because after 200 days um we’ve kind of gone to a situation where it’s stagnated a bit for the kind of front part of the other calculation if you like and so that affects their calculations as well so when you are looking at a wider time frame or going out you need to be a little bit mindful let’s bring it to 100 because i think maybe 100 uh that’s probably what a lot of swing traders

like to look at like to use and the objects list very easy to change it here by the way guys just go in and punch in what you want so and it’s even more exaggerated in 100 just because of the nature of the chart and you can see here look how simple moving averages caught up so quickly but the exponential moving the other way around sorry you can see how the difference is now

huge in many many more scenarios so if we scroll back and scroll back and scroll back

you know we see kind of normal market conditions where the distance becomes a little bit wider

and then when it comes coming back to test it you go right okay

we need to decide what we’re going to use so what’s this what’s the best way to use this what do i think is the a kind of better way to use this and let’s just go back onto your bridge list i’m going to make this a little bit thicker um the exponential here let’s just make this a tiny bit thicker

just so i can see it clearly so the exponential obviously catching up on price

a lot more we have this scenario where you can choose how to trade it if you want to be more aggressive

and you don’t only want to get into the trade then use the exponential because the exponential is going to trigger you earlier whether that’s a cross price crossing the exponential moving average or whether that’s a tag and a retrace back

you’re going to get an earlier trigger but the flip side of that is you might take more heat as the market rotates back a little bit more so if you’re in a scenario where okay i want to get on board this trend i want to take the trigger you can split up your order into exponential and simple so you put both on the chart you see if there’s a big spread between the two let’s say this scenario here and you go right i need to plan this and i’m going to trade my split my order up between the exponential and the simple assuming you’re using it by the way as an entry criteria so i’m going to split my order up i’m going to add a scale on the first batch let’s say if you’re spread betting here using pepper stone let’s say you want to do 10 pounds a point you can do one and then you do another one or you start off with a two and then a one and one all the way up to ten and you’re adding basically in this gap here so

while this has got a little drawing pen out here nice little feature uh in this little gap here you’re adding to the position so say now the dax decides to come back and you wanted to trade it you know you’d be adding from here

all the way to here and using both of those

as a guide and then when the simple finally catches up to the exponential you can go right okay well this looks like now the trade is running in my favor because that’s more than likely what’s gonna happen unless you’re stagnating sideways okay now when we come and we perhaps are using uh you know whatever target price target highs and come all in and all out so you can either use it as a reference to get in scaling in between the two or you can say actually

when the simple exponential catches up uh in this sort of scenario here i might i might also um

assume or think that actually price is now a little bit more stretched because we’ve been so wide apart here now we’re going to say wider part here ah maybe maybe this is a trigger for me to just relax a bit the market needs to stagnate of course it just sits there and and goes into range bound conditions so if you think about i’ve got covered a couple of different things there by by the way guys but if you think about what it’s actually telling you when the exponential is further away from simple and if you think about what it means when the market pulls back to it you can use both of them so in extreme circumstances if you want to get extra aggressive you can use the exponential if you want to really wait for it to unwind a little bit softer you’re simple someone to use or the hybrid model as we discussed scaling into the trade between the exponential and the simple now there’s only going to be under certain circumstances like this aggressive coronavirus hammer and rebound

are you going to get it on earnings if you’re trading specific stocks you might get it on all inventories if you’re trading on a short-term basis non-farm payrolls these kind of erratic volatile conditions will see a difference in exponential and simple

and you can toggle between the two depending on where price is depending on how aggressive you want to be and depending if you want to implement that kind of scaling strategy so being aware of what each moving average is doing understanding when they’re pretty much the same like if you’re using a 5 or a 20 or a 10.

they’re going to be pretty much the same they might spread a little bit but then they’re going to come back in pretty quickly when you’re using a longer moving average then they go out of sync for quite a while and understanding how to use them the relationship between them and price i could help you either get into a trade that you might have missed

or just make you step back a little bit and go hmm the exponential’s really gruckling up to the price let me go back and use a simple and just rotate off that and try to work that as an order entry trigger rather than the earlier exponential all right guys take care see you next one bye-bye you

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