Indicators and Tools: Moving Averages (SMA, EMA)

Moving averages are key indicators in technical analysis as they allow traders to smooth price data from a range so as to detect trends and potential turning points in the market. Key among the different Moving Averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). These are the most popular kinds of moving averages, with specific distinctive attributes as well as applications.

SMA is the most common averaging method, calculating the average price of an asset over time regardless of the time or the number of observations, then equally weighting all data points. For example, a 10-day SMA sums the last 10 days of closing prices and divides that value by 10. Hence, SMAs are great in providing a clearer overview for the current trend so that support-and-resistance levels can be identified. However, because they take longer to change with price movements, they are not very useful for being applied in choppy markets.

The EMA weighs recent prices more heavily than earlier ones hence it is very responsive to today's market silliness. In this respect, the EMA enables traders to take advantage of short bursts of price movements often occurring within days from the beginning of trend shifts. A 10-day EMA will move more rapidly than a 10-day SMA, hence giving traders timely signals.

To name few, among the numerous combinations of moving averages are the so-called "golden cross" or "death cross," whereby the shorter moving average is seen crossing above or below the longer one. With SMA and EMA incorporated into an analysis, traders can know how markets behave and effectively develop their strategies.

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~ Nesaty