The simple moving average (SMA) and the exponential moving average (EMA) are calculated differently. The simple moving average is simple average of all the price points in the series divided by the number of price points. The limitation of SMA is that all the data points will have equal weighting which may not properly represent recent price activity without looking at a shorter moving average.
The EMA was developed to give greater weighting to the most recent price action. This weighting may make the EMA better for trading short term trades as it is more sensitive to the current trends than the SMA. Another alternative is to use a shorter SMA average when trading short term.
The formula for each are below:
Simple Moving Average:
SMA = Here p=price and n=(total # of samples) each representing one price point in the overall average. A 200 day EMA will ikely have at least 200 price points to average.
p1 + p2 + p3 +p4 / n Example: 5 day moving average, one price point per day. $100, $105, $110, $115, $100 / 5 = Current SMA = $106
Exponential Moving Average:
Where: EMAt= EMA today
Vt= Value today
EMAt = EMA today
d = number of days Calculating EMA:
1. Calculate the SMA for the particular time period
2. Calculate the weight multiplier of the EMA using the formula: [2 ÷ (selected time period + 1)]. For a 10-day moving average, the multiplier would be [2/(10+1)]= 0.01818.
3. Use the smoothing factor with the previous EMA to provide the current value. For example, looking at a 10-day EMA for a share, the table below displays how the EMA would be calculated:
Whether or not to use an SMA or EMA or to use any moving average is a trader preference. These methods can be applied to trading any crypto, Bitcoin or alt coin trading all convey the same as trading traditional stocks using moving average.