What is EMA and SMA in the Share Market? | SMA vs EMA
When I started my journey in the stock market a decade back, then I was unsure which all things you should analyze before narrowing down your priorities. Over the course of time, I learned a lot many things which were never taught in the classroom. Guess that comes with time & experience. But when I’m here then you need to worry friends I’m here to make your journey a little easier which was not so possible a decade back. Let’s discuss What is EMA and SMA in the Share Market?
Firstly, we will try to understand EMA and SMA in the context of Share Market then will dive into their differences. EMA stands for Exponential Moving Averages whereas SMA stands for Simple Moving averages. Both are used in the market analysis as a technical indicator to help traders understand the price trends.
They work by smoothing out price bars and providing an average over a predefined time period. Thereby, allowing traders to gain a better understanding of what is going on in the markets. Rather than predicting new trends, they are more commonly used to confirm them. Thus, if price bars move in the same direction as their moving average, they are easier to confirm.
An exponential moving average (EMA) is a type of moving average (MA) that gives the most recent data points more weight and significance. The exponential moving average, also known as the exponentially weighted moving average, is a type of moving average.
Moving averages are one of the most important indicators in technical analysis, and there are numerous variants. The SMA is the simplest moving average to create. It simply represents the average price over the specified time period. SMA is simply the mean, or average, of the stock price values over the specified period.
Traders use both moving averages for different investment horizons. Typically SMA is used more widely however to check the trend over a short period you can plot the prices using EMA as well.
What is the difference between SMA and EMA?
Here are the key differentiators between both the technical indicators:
|Exponential Moving Average (EMA)||Simple Moving Average (SMA)|
|It is quicker to react to price changes.||Whereas it is slow to react to price change.|
|The weightage of recent data will be high in EMA.||On the other hand, the weightage of each data point remains the same irrespective of the period it belongs to.|
|This is used by traders to study the trend over a short period of time in the market.||Long-term trader prefers SMAs since they don’t rush to act and prefer to be less active in their trades.|
|Quickly moving and good at displaying recent price swings.||Displays a smooth chart, which eliminates the majority of fakeouts.|
|More prone to causing fakeouts and sending erroneous signals.||Slow-moving, resulting in a lag in buying and selling signals.|
In a nutshell, moving average preferences typically depends on an investor’s time horizons and objectives. Experiment with different types and different time periods. You’ll figure out which moving averages work best for you over time.