Difference Between Exponential Moving Average (EMA) & Simple Moving Average (SMA)
1. Simple Moving Average (SMA):
- Calculation: SMA is the average of prices over a specific number of periods. Each price in the period is equally weighted.
- Formula: where are the prices over periods.
- Example: If you're calculating a 5-day SMA with prices [10, 12, 14, 16, 18], the SMA is:
2. Exponential Moving Average (EMA):
- Calculation: EMA gives more weight to recent prices, making it more responsive to new information. It uses a smoothing factor (usually denoted as α) which gives more importance to the latest data points.
- Formula: where .
- Example: To calculate a 5-day EMA with the same prices [10, 12, 14, 16, 18]:
- Step 1: Calculate the initial EMA using the SMA (which is 14).
- Step 2: Calculate the EMA for the next day using the formula. Assume the next price is 20, and :
Key Differences:
- Responsiveness: EMA reacts more quickly to price changes because it gives more weight to recent data, whereas SMA is slower because it treats all data points equally.
- Use Case: Traders often use EMA for short-term trading to capture trends earlier, while SMA is used for long-term trends.
Comments
Post a Comment