What are simple & exponential moving averages in Day Trading? By Coach Yoann

Moving averages are one of the most popular and commonly used technical indicators in day trading. They are used to smooth out the volatility and noise that occur in the markets, and to identify longer-term trends. There are two main types of moving averages – simple and exponential – which differ in the weighting given to more recent data.

What is a Simple Moving Average?

A simple moving average (SMA) is the average of a given set of data points over a specified period of time. The SMA is calculated by adding up the closing prices for a given period and then dividing by the number of data points in that period. As the name implies, it’s a simple calculation, and it only considers the closing prices during the set period.

The SMA gives equal weight to all data points, regardless of when they happened. This means that the SMA is slow to react to price changes, as it takes time to “absorb” new information. Thus, SMAs are best used to identify longer-term trends. It’s also important to note that SMAs are lagging indicators, meaning they will only react to price changes after they have happened.

What is an Exponential Moving Average?

An exponential moving average (EMA) is similar to an SMA in that it’s used to smooth out the volatility and noise in the markets. However, the EMA gives more weight to the more recent data points, meaning it will react more quickly to price changes.

The EMA is calculated by applying a multiplier to the most recent closing price. This multiplier is calculated by taking the exponential of the total number of data points in the set period. As such, EMAs are more responsive to recent price action, and they can be used to more quickly identify short-term trends.

How are Simple and Exponential Moving Averages Used in Day Trading?

Both SMAs and EMAs can be used to identify trends in the markets and to help day traders make better decisions. SMAs are best used to identify the longer-term trend in the markets, while EMAs are best used to identify shorter-term trends.

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