Moving averages are extremely important tools for measuring price strength, as well as finding appropriate entry and exit points. So today we are going to be comparing and contrasting the two most important and frequently used moving averages on the market: the simple moving average and the exponential moving average and I Like to think of the EMA as sort of the SFA's moody cousin. it's more indecisive and heavily emotional, widely influenced by what's happening in the moment instead of what's happening overall, but that's not necessarily a bad thing. On the other hand, the estimates benefits are widely different based on how you set the specifications.

For example, the short-term SMA is excellent for fighting execution points and measuring price strength, where the long-term SMA is excellent for measuring trend strength and spotting reversals. And we're going to be discussing all of this. but all I ask of you in return for this video is that you hit that beautiful and ravishing like button. And also don't forget to subscribe if you see value in the following video.

Ok, so to start, I've configured the lines to be specific colors to make this video a little bit clearer. My regular SMA line is blue and the EMA is purple. After we compare and contrast these two I'm also going to be talking about the longer-term SMA, but for now, let's just keep this simple with just the regular old-fashioned SMA and EMA line. And for those who are wondering, my specifications for these are both set to default just if you're using fingers limits whatever the default characteristics are.

With one exception for the SMA and that is simply the aggregation period fusing Weeble or to whatever other broker that you're using that's totally fine. You just need to copy the specs. Ok, so let's go ahead and define the big difference between them before we actually break down how they look. Now, the formula difference is that the EMA is more sensitive to recent prices as compared to the SMA, while the SMA weighs all price action in its aggregation period equally.

The EMA weighs the most recent price action a lot more heavily. And what that means is that it's going to be more reactive. Put simply, the EMA is the more reactive version of the SMA. If something moves quickly, the EMA is going to react more to that.

So if we apply this to an actual example, right off the bat, you may notice that they look very similar. You could see some differences, but overall very similar. It looks like a lot of the same points of execution. In fact, as a measure of price.

In this particular region, you will see that they provide the exact same conformation, which again, if you're unfamiliar with conformation, that's of course, the first candlestick holding above the line. And of course, they provide a similar measure of price strength as well, which again is signified in price action moving farther or closer away from the moving average. So if anything, you may come to the conclusion just looking at this that there is little difference in the two, but that the EMA is more reactive to current priced rates and thus must be more relevant. Well, that's not necessarily the case.

A lot of people don't really know the difference between these two and often mix them up, which is unfortunate because there are some big differences. And debating the difference between the EMA and the SMA line, you may ask yourself, doesn't the EMA provide a more conservative estimate since it's more reactive? This is true. In hindsight, the EMA could be seen as providing a more conservative estimate, as for example, an uptrending stock will have to hold slightly harder for confirmation, and price strength will generally be measured weaker on the EMA line as compared to the SMA line. And this is just by nature of the formula because as it's going up, the EMA line will quickly adjust with it where the SMA line will have a lag because it doesn't weigh the recent price action as heavily as the EMA and this is because the uptrending price action is going to hold closer to the EMA line as compared to the SMA line.

Since again, the EMA line weighs recent price action more heavily as compared to the SMA line. The SMA line weighs all price action equally. so any new price action is going to be weighed at the same as the old, whereas the EMA weighs new price action more heavily. so it's going to jump around a lot more so in practice.

The EMA line may be more conservative for measuring actual price strength, but the problem is that the EMA is extremely weak when it comes to measuring price weakness. The reactiveness of the EMA means that it will be a lot more forgiving and less objective when it comes to measuring price breakdowns. For example, look at this original run up and QD We saw a confirmation and then priced raked and then a bit of a pushback. You'll notice this price weakness with the price action dipping closer to our moving averages, but you'll also notice that the EMA dipped along with our price action.

And since we measure a reversal of trend by a dip below the moving average, that means that in effect, the EMA just made us a lot more forgiving of a dip. Since it's more reactive than the SMA, it would take a much more rapid Crees for us to declare a trend reversal with the EMA as compared to the SMA line that stays more objective even if the stock starts taking. So in effect, the reactiveness of the EMA makes it more conservative for measuring price strength. But the double-edged sword with this is that it's also more conservative for keeping you in a position that is going poorly.

A double-edged sword that helps you not be overconfident in increasing positions when the stock is going up, but it is overly forgiving in decreasing position so you lose out on that end. The SMA line on the other hand, stays a lot more objective and tends to provide clearer runs on price strength since it is less reactive to the quick mood swings of the market. And my experience, the SMA line is both a conservative estimate but not too conservative and works great for both sides. So that pretty much sums up the SMA versus EMA and why I prefer the SMA.

Now, as promised, let's go ahead and talk about how the longer-term SMA compares to the other line. Now, the longer-term SMA is an excellent tool for spotting reversals and measuring price strength. While the short-term SMA allows you to track minute by minute price action, the longer-term SMA looks more towards the bigger picture of the overall trend. For example, if we were looking at NVDA and we are analyzing it using our longer-term SMA line, we can get a feel for how strong the trend is.

You can see a strong uptrend here as the price action was gapping far from the SMA line and weakened in here as it got closer. Likewise, we could see it struggled to hold the trend as it uses SMA as support and then break back and forth over the trend. And here we see weakness below the SMA line. If we are looking in Amazon, we see a trend reversal marked by the break below the SMA line and then periods of the downward Direction becoming weaker and stronger as it goes farther and closer to the SMA line.

and then boom. We have a break above the SMA line which signifies an overall change of trend once again towards an upward direction. Another example: Zillow Zillow's uptrend has overall strength and then boom signifies trend reversals weakness and overall direction shows that. Ok, there isn't really a clear direction upwards or downwards, so we have that extra risk factor.

But furthermore, this is very important because understanding which direction that price action is heading can make or break a lot of your trades. Trading is all the odds, gain, and the overall direction be met up or of the stock is going to have a huge impact regardless regardless of when and where you take your position. If you are buying into stocks with an overall strong upward direction, you are much more likely to realize profits sets. Even if you mess up with your entry point, the stock is still probably going to go up.

Overall, if you're buying a stock with a downward direction, even if you have great entry points in a falling stock, you are still fighting the overall direction. so that's a huge thing against you. So with that being said, I should also mention the specs for the longer term. As an A-line the only difference is that I have the length up to 180 and that's that's the only difference.

Okay, so knowing the uses of our moving averages, you may ask yourself, well, Charlie how do I combine this to make for better trades? Well, great question. We can use both of them to locate positions that have an overall upward direction as well as a good entry point. If we combine these two together, we increase our odds of success overall. For example, say we want to take a position on drip right? Here is the overall direction of drip upwards or downwards.

Well, it's quite clearly upwards and we know that because the price action is trading above, the long term has some a line. This may sound very obvious, but this is a very foundational skill to understand what is going on. But moving closer to our actual entry point, we can see that. Okay, now I see a confirmation over the regular SMA line and I'll feel more confident buying in because not only do I have a confirmation, but I also have the overall direction in my favour.

And with that in mind, I'll make sure to follow the price strength and if we start seeing price weakness on the regular SMA then I'll have to start looking for my exit or validation point. So here's an example of one me longer-term SMA will keep you out of a position that you shouldn't be in. say you are considering taking a position in Tesla upon confirmation. Now you could justify this to yourself by explaining that this is part of an intraday discount, but you would be stopped right in your tracks as that is clearly part of an overall downtrend and not a discount.

Since the overall direction is not in your favorite, you will know that you do have a major factor pushing against you. That doesn't mean that the stock is going to keep going down, you're going to be wrong. It just means that this confirmation isn't going to be as valuable as a confirmation that was above the long-term SMA line. When you have a major factor such as action pushing against you most of the time, it's going to be better to simply just wait for a trend reversal.

So here's our second example: Beautiful volatility on a SCM a huge clean run ups over the SMA line and several beautiful confirmation points as well, but focusing on buying in a confirmation upon also confirming an upper direction with the price action, trading above the long term SMA line would have saved your entry points more often than not. As you can see the best and most predictable entry points happen when the stock had an overall upward Direction. This is not a coincidence. A stock trending upwards overall is obviously going to be easier to trade, and we noticed that when the price action breaks the trend all of a sudden, the entry points and confirmation get more sporadic and less profitable.

then boom. We have another trend reversal, but this one was not as strong as the last as we can measure it by analyzing the amount of real estate between the price action and the SMA Here's another example. so OB Ln had quite polarized price action that provided a lot of opportunities on this particular day, but understanding an identifying direction would have been a game-changer in the beginning. We are trading below the long term SMA but the trend strength is pretty.

No, it's not moving much towards or away from the price action until we have the trend reversal here. So yes, there are several different confirmation points that you could have bought in with, but the best points that would have lowered your risk were the ones where the overall direction was trading upwards. Simply unnecessarily challenging to find good entry points when we are in a general downtrend and that's why I Always recommend checking to make sure that you have the right general uptrend over the SMA line and I'll give you one more. VT VT had an overall upper direction all day, keeping it strength all day over the long term SMA line.

So that meant that identifying this you would know that in terms of direction, you are in the clear for that day and knowing that you are in the clear, you could focus on buying in upon confirmation and riding the price ranks over or a regular SMA line. But anyways I Hope this video was helpful in determining the difference between the EMA and the SMA. If you have any questions, don't forget to reach out to us below or join the zip trader circle Facebook group. You can also check out our trading Tutorials playlist where I structured everything in a way that you could go on the playlist and then just work your way down and learn all of the material that you need to know.

Anyways, folks have a great and I'll see you in the next video.