Simple vs. Exponential: A Comparison

In looking at the two types of moving averages, you can come to a very simple conclusion: use what works best for you. Each can be used to produce successful trades, and some traders even use both!

In general, we can look at the moving averages broadly to come to some conclusions:

• SMA – The simple moving average is slower to catch onto new trends, and may often throw false signals because the moving average doesn’t weigh recent activity to the same degree as an exponential moving average.
• EMA – The exponential moving average is faster, more likely to look like the currency pair chart, but can also throw false signals because it is affected greatly by short-term changes in the price of a currency pair.

Later on in this forex tutorial you will see how risk management works in deciding how to trade. Risk management isn’t just dollars, cents, or statistics—and you’ll find that a proper risk-management strategy means building a trading strategy that revolves around the indicators you use.

A simple moving average, since is moves slowly, is more likely to generate buy or sell signals further through the changing trend than an exponential moving average. To compensate, you might find that you can confirm the signal with another indicator, or moderate your stop loss and take profits so that you earn enough on winning trades to cover the losses on losers.

The opposite may be of interest for you with the EMA. If you use an EMA, then you might decide to confirm with candlesticks, or other technical indicators, or simply adjust stop losses and take profits for profitability.

At any rate, we’re going to explore further how you can use the SMA and EMA to generate trading signals. Each is excellent for determining:

• Support and resistance
• Changing trends
• Confirming other technical indicator