Similarly, If the price trades above the MA, it is considered as an uptrend. If the price trades below the MA, then it is denoted as a downtrend. The MA is looked at as a baseline and traders define the trend by looking at the price in respect to the MA. In the above 1 min chart of Microsoft Corporation, the 14 SMA is plotted in red. Let’s look at an example of 14-day simple moving average on the chart of Microsoft. Using Moving Averages As Buy and Sell Signals:Īlthough moving averages are considered as a “Lagging Indicator”, they can still be used to confirm the entry and exit points for a trade. Interpreting support & resistance levels. Moving averages have 3 main applications, they are as follows: The EMA also forms a better resistance & support zone when compared to the SMA which lies at the middle, as it is the average depiction of the price.ĭue to these reasons, some traders prefer to use the EMA over the SMA as it is more responsive and provides a moderately better outlook of the trend. Here is the 15-min chart of Apple and I have plotted the 20 EMA (In Red) and the 20 SMA (In Green).Īs you can see, the EMA (Red) line is more responsive to the price and the change is quicker compared to the simple MA line. Let’s understand the difference between the “SMA” from the “EMA” from the chart given below. Unlike the SMA which gives equal weightage on all prices. While calculating the EMA, the recent price is given a higher weighting and older prices are given lower weighting.
The exponential moving average is like the SMA but with a twist. This can be 7 days, 20 days, or 200 days for example.Ĭlick Here For Our Top 7 Indicators Exponential Moving Average (EMA): In simple words, the SMA provides the average price of the underlying asset, for a particular period. Here “P” denotes the price of the underlying asset. It is calculated by the following formula. The SMA is calculated by obtaining the average price. The simple moving average (SMA) is a technical indicator that is frequently used by traders and investors. There are 2 types of moving averages that are commonly used, they are:Įxponential Moving Average (EMA) Simple Moving Average: Moving averages can be based on any time frame as selected by the user. MA is plotted by a line on the chart that portrays the average price of the underlying to determine the trend. In layman terms, A moving average is a visual portrayal of the average price of an asset in a line format on any candlestick chart.
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