Why The Exponential Moving Average ‘Carries More Weight’ In Technical Analysis

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The Exponential Moving Average (EMA) weighs current prices more heavily than past prices.

This gives the Exponential Moving Average the advantage of being quicker to respond to price fluctuations than a Simple Moving Average; however, that can also be viewed as a disadvantage because the EMA is more prone to whipsaws (i.e. false signals).

The chart below of eBay (EBAY) stock shows the difference between a 10-day Exponential Moving Average (EMA) and the 10-day regular Simple Moving Average (SMA):

exponential moving average reacts faster to price changes than the simple moving average

The main thing to notice is how much quicker the EMA responds to price reversals; whereas the SMA lags during periods of reversal.

The chart below of the Nasdaq 100 exchange traded fund (QQQQ) shows the difference between moving average crossovers (see: Moving Average Crossovers) possible buy and sell signals with a EMA and a SMA:

three simple moving average crossover potential buy and sell signals

As the chart above of the QQQQ's illustrates, even though EMA's are quicker to respond to price movement, EMA's are not necessarily faster to give possible buy and sell signals when using moving average crossovers.

Also note that the concept illustrated in the chart above with Exponential Moving Average crossovers is the concept behind the popular Moving Average Convergence Divergence (MACD) indicator; (see: MACD).

Since Exponential Moving Averages weigh current prices more heavily than past prices, the EMA is viewed by many traders as superior to the Simple Moving Average; however, every trader should weigh the pros and the cons of the EMA and decide in which manner they will be using moving averages.

Nevertheless, Moving Averages remain the most popular technical analysis indicator out on the market today.

How to Start Trading

If you are interested in trading stocks and commodities using technical analysis, have a look at our reviews of these regulated brokers available in to learn which charting & analysis features they offer:

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.0%-89.0% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Further Reading

Learn more about technical analysis indicators, concepts, and strategies including Support & Resistance, Moving Averages, Fibonacci Patterns, and many others.

Also see our guides on Forex, Bitcoin, CFD, and Option brokers to find out which technical analysis tools and platforms popular online trading brokerages offer their clients.

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