Having previously discussed the basics of Moving Average let’s look at the 3 different types:

• Simple Moving Average (SMA)
• Exponential Moving Average (EMA)
• Weighted Moving Average (WMA)

With the weighted moving average, different recipes exist – the weighting may involve volume or such quotients – it’s more complex and perhaps best left for now.

Simple Moving Average (SMA):

where
P = price,
n = the moving average period.

Exponential Moving Average (EMA):

EMA_t = EMA_t-1 + (K[Price_t - EMA_{t - 1}])

where
t = current time period,
t -1 = previous time period,
K = 2 / (n + 1)
n = the EMA period.

If you know a bit of math, you see that there’s an iteration going on – not to worry if this isn’t your thing – the charting software does all for us nowadays…

The advantage of the exponential moving average is that it gives greater weight to more recent prices compared to older prices – what’s happened recently is likely to be that much more important, after all. With the simple moving average, all prices old or new have the same weight and the same influence on the plot.

Here’s 21-period SMA and EMA plotted together:

Red = Simple Moving Average
Purple = Expontential Moving Average

As you can see, the SMA is slower to respond to movements in price, but gives a smoother result – the EMA is quicker to respond, but at the expense of the odd false signal here and there – of course this can be juggled with to some extent by use of different periods.