AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |
Back to Blog
Sma vs ema1/2/2024 So, a 10-day average is recalculated by adding the new day and dropping the 10th day, and the ninth day is dropped on the second day. This means old days are dropped in favor of new closing price days, so a new calculation is always needed corresponding to the time frame of the average employed. Moving averages are termed "moving" because the group of prices used in the calculation move according to the point on the chart. This formula is not only based on closing prices, but the product is a mean of prices - a subset. The 20-day moving average is calculated by adding the closing prices over a 20-day period and divide by 20, and so on. To calculate a 10-day simple moving average, simply add the closing prices of the last 10 days and divide by 10. This process was quite tedious, but proved quite profitable with confirmation of further studies. They calculated market prices by hand, and graphed those prices to denote trends and market direction. Early market practitioners operated without the use of the sophisticated chart metrics in use today, so they relied primarily on market prices as their sole guides. Preferred method for tracking market prices because they are quick to calculate and easy to understand. (Would you like a little background reading? Check out Moving Averages: What Are They?) It is generally understood that simple moving averages (SMA) were used long before exponential moving averages (EMA), because EMAs are built on SMA framework and the SMA continuum was more easily understood for plotting and tracking purposes. Charting analysis can be traced back to 18th Century Japan, yet how and when moving averages were first applied to market prices remains a mystery. These are now considered basic methods currently used by technical analysis traders. Understood, various shaped curves and lines were drawn along the time series in an attempt to predict where the data points might go. Much later, as patterns were developed and correlations discovered. Interpolation, in the form of probability theories and analysis, came Early practitioners of time series analysis were actually more concerned with individual time series numbers than they were with the interpolation of that data. Note: The pair of red and green lines overlaying price on the chart above are the 50 & 20 EMAs.Moving averages are more than the study of a sequence of numbers in successive order. Bearish crossover are also identified via the red colored histogram bars which represent negative values. Any histogram reading below zero means that the faster average (20 day) is trading below the slower average (50 day). In the example above, I’ve highlighted the crossovers using a histogram, as it makes for a more clear visual than trying to discern when the moving average lines have actually crossed over. As this daily chart of the $SPX shows, the exponential pair has done a better job of avoiding whipsaws (false buy or sell signals) than the simple moving average pair. However, as I’ve recently discussed the bearish 20/50 ema cross, which is used to help define the intermediate-term trend, this chart helps illustrate why my preference has been to use the exponential setting on the popular 50/20 moving average pair vs. Although I typically prefer exponential averages, I am not married to the use of either (or any of the other variations used in the calculation of moving averages). Some traders & technicians prefer using simple moving averages over exponential moving averages.
0 Comments
Read More
Leave a Reply. |