In essence, a Simple Moving Average (SMA) is an expression of the average closing price of a financial instrument over a particular number of periods.
Any number of time periods can be used, but the 5, 10, 20, 50, 100, and 200, are among the most popular. Each ‘period’ represents a period of time, for example, 5 minutes, 10 minutes, 2 hours etc. but for swing traders, each period will likely be 4 hours or one even one trading day.
Swing traders are focused on profiting from the main part of the trend. They’re not interested in trying to join a trend right at the start or leaving right at the end, the meat in the middle is where their profits come from.
In contrast, an Exponential Moving Average (EMA), gives greater importance to closing prices during the more recent periods.
While the calculation of the EMA can be a little complicated, fortunately, our software will perform them for us instantly and automatically.
The key takeaway is that EMAs are likely to give us a better indication of the current direction and strength of a trend than SMAs. And the fewer periods used, the more sensitive the picture will be to recent market sentiment.