In the financial world, two of the most crucial concepts when it comes to making decisions are trends and forecasts. One of the most important tools used to help identify and track these trends is called the ‘Moving Average’. A Moving Average (MA) is simply a way to study the average price of a stock or other asset over a period of time. It’s one of the simplest and most reliable methods that investors and traders use to gauge the momentum of a stock or other asset.
When using a Moving Average, there are broadly two options available: simple and exponential. Let’s take a look at what the differences between these two complex methods are.
Simply speaking, a Simple Moving Average (SMA) is calculated by adding up the closing prices of a stock or asset for the last ‘x’ number of days, and then dividing it by the number of days. For example, if you’re using a 10-day SMA, you would add the closing price of the stock or asset for the last 10 days and divide it by 10.
The second type of MA is the Exponential Moving Average (EMA). This type of Moving Average is a bit more complicated than the SMA, as it puts more emphasis on current prices as opposed to past prices. This is done by applying more weight to recent prices and less weight to older prices. This helps to ensure the MA is more timely and accurate.
So which Moving Average is better? The answer to this question depends on what sort of goal you are trying to achieve. Simple Moving Averages are great for investors that are looking for short-term trends, but they may not be as effective at identifying long-term trends. Conversely, Exponential Moving Averages are better at understanding longer-term trends, but may not be as helpful with shorter-term trends.
Ultimately, the choice between a Simple Moving Average and an Exponential Moving Average is up to the investor. Knowing which type of Moving Average best suits your investment goals is a great way to ensure that your forecasts are more accurate. Try out different types of MA’s and see which one works best for you.