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What are the main advantages and disadvantages of using a Simple Moving Average (SMA)?

Modified on: 2018/07/11
A:

Although traders and analysts may argue over which is more effective, a simple moving average (SMA) or an exponential moving average (EMA), each one has strengths and weaknesses. The question of which one to use is typically settled by the user's trading style or analytical frame of reference. A trader's preference is usually based not on the belief that one version of the moving average is inherently better than the other, but more likely on which one best suits his or her purposes for analysis or trading.

The SMA is the most straightforward calculation, the average price over a chosen time period. The main advantage of the SMA is that it offers a smoothed line, less prone to whipsawing up and down in response to slight, temporary price swings back and forth. Therefore, it provides a more stable level indicating support or resistance. The SMA's weakness is that it is slower to respond to rapid price changes that often occur at market reversal points. The SMA is often favored by traders or analysts operating on longer time frames, such as daily or weekly charts.

The advantage of the EMA is that by being weighted to the most recent price changes, it responds more quickly to price changes than the SMA does. This is particularly helpful to traders attempting to trade intraday swing highs and lows, since the EMA signals trend change more rapidly than the SMA does. The concurrent disadvantage of the greater sensitivity of the EMA is that it is more vulnerable to false signals and getting whipsawed back and forth. The EMA is commonly used by intraday traders who are trading on shorter time frame charts, such as the 15-minute or hourly charts.


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