Moving averages (SMA and EMA)
A smoothed line of recent prices that shows the trend’s direction, and how the two kinds differ.
6 minLesson 3 of 102 questions at the end
Key ideas
- 1A simple moving average (SMA) is the average close of the last n candles. Lance Trade’s chart starts it at 20.
- 2An exponential moving average (EMA) weighs recent candles more, so it turns sooner. The chart starts it at 50.
- 3Price above a rising average suggests an uptrend; below a falling one, a downtrend.
- 4Averages lag. They describe the trend after it has started, and give many false turns in a sideways market.
Two kinds of average
Formula
SMA = (close₁ + close₂ + … + closeₙ) ÷ n
An EMA gives the newest candle the weight 2 ÷ (n + 1), and the rest less and less.
A simple moving average treats the last n closes equally. An exponential moving average leans on the newest ones, so it turns sooner when the price does.
SMA and EMA, same length
Made-up candles. Drag the length: short averages hug the price, long ones smooth it out. Notice how the EMA turns first.
Made-up 1h candlesWorked out like Lance Trade’s chart
O 86,843H 87,700L 86,823C 87,501SMA 85,043EMA 85,665
Length20
Reading them
- Price above a rising average: the trend is up. Below a falling one: down.
- A flat average with the price crossing back and forth: no trend, and averages say little.
- A short average crossing a long one shows the trend may be changing, after it has started.
What they can’t do
Common mistakes
- Trading every cross of price and average in a sideways market. That is where averages work worst.
- Using a short average on a long timeframe, or the other way round, without checking what it shows.
- Expecting the average to hold as support every time.
Check yourself
Question 1 of 2
Which reacts faster to a sudden move, a 20-period SMA or a 20-period EMA?
Keys 1 to 3 pick an answer, Enter checks it
Try it in Lance
Open Indicators on the chart and add both, then change their lengths to see how the lines move.
Add an SMA and an EMA