Do you prefer EMA or SMA when you trade?


#1

I would guess SMA for the higher MA’s and EMA for the lower MA’s.


#2

I prefer SMA when I trade.


#3

If I am going to use an Moving Average

I prefer the EMA (Exponential Moving Average) versus the SMA (Simple Moving Average)

SMA adds the last x number of bars closing prices and diveds them by x number

ie last 10 bars closing prices and divides that sum by 10 to get the 10 SMA.

it is easy to calculate and was used by traders at lot before the 60’s as technology started to come into play and was used less and less as technology became more mainstream in the late 80 and 90’s.

A simple moving average is less sensitive to price changes so it moves slower. It simply averages the closing prices of the last x number of bars and recalculates on each bar. Therefore it gives equal weight say 10% on a 10 SMA to the most rececent bar as it does do the every other bar even the bar from 10 bars ago in the formula. It is good for getting a trend line far away for a longer time trend that is less likely to be touched. However, do to its lack of sensitivity in price movement it is not as useful in shorter term markets and will be very late in a trend direction confirmation.

Due to this i prefer the EMA over the SMA.

The EMA uses a more complex formula:

K Formula: 2/(1+N) (N = Number of bars to look at) (K formula is a value we will reference later in the main formula)

add closing prices for the first x days together and divide them by X days (ie a simple sma) - this is just to start the EMA plot not how to calculate it after these initial N bars on 1 bar + N bars you can begin to calculate the ema and on the N bar +2 more bars you are actually using the formula for a EMA as you need an previous EMA to calculate an EMA accurately

Now from there you can begin to calculate EMA

Now you take the 1+ N period bars closing price and x K (the 2/(1+N)=? formula)

Multiple the previous days moving average by 1-K) and now add the two together

Do the above and after 2x N days/periods s you will have a true ema plot going forward

EMA = ((Current Price*N)+(Previous EMA * (1-N)))

If your head hurts don’t worry… that is why we use computers :slight_smile:

The benefit of the EMA can be seen in the 2/1+N) formula

What this does is it gives the most recent price more weight in the % formula of the past N bars instead of giving all bars equal weight. So each bar close constantly recalculates and giving a progressive strength and weighting to prices later in the moving average than at the beginning of it.

ie a 22 EMA gives 2/(1+22) 8.69% weight to the most recent closed bars price

A 10 EMA gives 2/(1+10) 18.18%% weight to the most recent closed bars price

A 8 EMA gives 2/(1+8) 22.22% weight to the most recent closed bars price

All that being said my 1 issue with EMA’s is they only move in one direction. ie they are trending up or down slowly but never zig zagging when volatility dictates it so they are slow and easily hit.

The solution i have made to this is the improved volatile trend line with offset and predictor line. This accounts for current market volatility (so it can move in and out of the way fo the market without changing trend confirmation to fast but can move on moments notice to do so without giving confusing long/short middle of the road signals like an EMA. It also includes a predictor line (when it goes flat often the market is about to change direction). Note we only take the trend change if it breaks the high on a long or the low on a short bar we don’t take it just because it flips. (see more about this in the indicator videos section under structure for MVP.

Example 1

  1. notice the red volatile trend line moves down very fast crosses below the price line to signal caution.
  2. the 10 EMA and the offset both get hit about the same time for a trailing stop. However price closes above the ema and it flips (ie a long) but the MVP has not flipped but the predictor has when flat signaling a long may be coming. The market then surprisingly drops (glad did not take that long based on the EMA) and a MVP gives a long…but the high is not broken and it quickly confirms short…
  3. the market trends down up down up and basically the net result is zero…
  4. Then the market starts to go long and the volatile trend line is right on the market hugging it before the market flips (so caution consider tightening stop immediately depending on the amount of profit you have etc… maybe just on part of the position etc… (versus waiting on offset to be hit on the whole positon. You can always add back in if it keeps going…you get another mvp (or apex confirmation etc…) - offset is in case of a fast move but if the volatile line gets hit consider partial profits/tightening stop)…
  5. The market then turns around and goes south the EMA is in a state of flux above below above below which way do you go… the MVP makes it crystal clear go short and notice the Volatile Trend line on MVP (not the old one) how it really moves out of the way up and down zig zagging based on market volatility.

Example 2

  1. EMA can’t make up its mind up down up down up down…
  2. Volatile Trend line MVP short conformed. predictor and offset are moving on down and staying off the market. The volatility is so low bars are so small due to time of day using the volatile trend line for a trailing stop would be over cautious and get you kicked out. Stick with the offset line…
  3. market flies down pops up. You can use the volatile trend line and hop out…then back in when confirms… you can use the SMA but then you went long also and that would have lost as market dropped…
  4. Or you could use the offset line and notice how it stays out of the markets way and allows the market to pull back and then continue.

Example 3

SMA gives no clear indication of direction as it is right in the middle of price 1,2,3,5,7 MVP Volatile says short with offset line predictor confirmations 1 (on 2 it never gets high broken and offset line never hit for trailng stop) goes back short - then 3 levels off and flip happens on 4. then flips down on 5 but with no low being broken and goes long again on 6 massive move up then market flips exit with small profit (unless trailing stops took profit etc…) then market goes short and drops (unlike sma takes forever to figure out trend direction MVP calls it much faster.

Basically the MVP uses 5 factors to determine market volatility, keep the line tight, not let it change without multiple confirmations, but this does not slow it down due to how tight the formulas are tied into volatility.


#4

Thank you.

I get it.

So if we have a 10 EMA and the formula is 2/ (1+10) which is 18.18%. So the weight it gives to the last bar is 18.18%.

Could you then figure out the weight given to the 2nd to last bar by doing: 2/ (2+10) 16.67%

and the 3rd to last bar by doing: 2/ (3+10) 15.38% etc.?


#5

You could… the % gets larger the smaller your EMA is …

The point is not figuring out the weight of the bar…

There is a lot you can figure out in trading. But what will make you money is the question.

It is understanding that an EMA gives more weight to newer closes and less weight to older closes - so more recent price action impacts it more… versus giving it equal weight despite it being 10, 20 100, 200 bars back


#6

I understood the point.


#7

Cool probably a bigger answer than you where looking for just trying to be thorough. :slight_smile:


#8

I like the big answer.

Not only does it help me, it also helps other people who may come across it later. :slight_smile: