SMA vs. EMA: Which Moving Average Should You Use?
Both MACD and RSI, which we covered the last two weeks, are built on top of moving averages. So it's worth stepping back and looking at the building block itself: there isn't just one kind of moving average. The two you'll run into constantly are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA), and the difference between them changes how fast an indicator reacts to new price action.
Neither one is "more correct" than the other as they're built for different jobs, and knowing which is doing which job will make every indicator you've read about in this series make more sense.
What SMA and EMA Actually Are
A Simple Moving Average takes the closing prices over a set number of days say, 20 and averages them, giving every single day equal weight. When a new day's price comes in, the oldest day drops off the calculation and the new one is added, so the average shifts smoothly over time.
An Exponential Moving Average also averages recent prices, but it doesn't treat every day equally it gives more weight to the most recent prices and progressively less weight to older ones. The practical effect: EMA reacts faster to what price is doing right now, while SMA is slower to respond because it's still being pulled by prices from further back in the window.
This is exactly why MACD, which we covered in week two, is built from EMAs rather than SMAs its whole purpose is to catch momentum shifts quickly, and EMAs are more responsive.
You can try these at the site and overlay these 2 types of averages to see the differences. Here is an example chart from our site:
A Concrete Example: Watching Them React Differently
Picture a hypothetical stock, "ABC Corp," trading steadily around $50 for a couple of months, then gapping down to $42 in a single day on disappointing news. Both its 20-day SMA and 20-day EMA had been sitting just under $50 before the gap.
The EMA reacts almost immediately because it weights recent prices heavily, it starts dropping noticeably within a few days of the gap, and price quickly falls below it, an early signal that the trend has shifted. The SMA, by contrast, barely moves at first. It's still averaging in all those steady $50 days from earlier in the window, so it takes much longer often a couple of weeks before it meaningfully reflects the new, lower price level. A trader relying only on the SMA would get the "trend has changed" signal noticeably later than a trader watching the EMA.
Now flip the scenario: imagine ABC Corp instead chops back and forth between $48 and $52 for a month with no real direction. Here the EMA's speed becomes a liability it swings up and down with the noise, generating crossover signals that immediately reverse, while the smoother SMA mostly rides through the chop without whipsawing. Responsiveness cuts both ways: it catches real moves earlier, and false ones more often.
So Which Should You Use?
There's no universal answer, it depends on your time horizon and what you're trying to catch. Short-term traders often favor EMA precisely because catching a move a few days earlier matters more to them than the extra noise. Longer-term investors often favor SMA for exactly the opposite reason: smoothness over speed. The widely watched "200-day moving average," used by many market commentators as a rough bull-market/bear-market dividing line, is traditionally an SMA for this reason it's meant to represent the established trend, not the latest wiggle. Plenty of traders simply use both together: an EMA for early signals, an SMA for context on the more durable trend.
The Limits Either Way
Whichever type you choose, remember that both are lagging by definition they're calculated from past prices, so neither predicts what happens next. The choice of time period (10-day vs. 50-day vs. 200-day) generally matters as much as the SMA-vs-EMA choice itself, and it should match what you're actually trying to measure: a short window for near-term timing, a long window for the broader trend.
Check the Fundamentals Behind the Signal
A moving-average crossover tells you what price is doing it says nothing about whether the underlying business supports that move. Before acting on a crossover, TruCharts' earnings and financials data lets you check a company's actual earnings and revenue trend in the same place you're already looking at the chart.
Benefit: you can quickly sanity-check whether a technical signal lines up with the fundamental picture, instead of trading the chart in isolation.
Subscribe to TruCharts for free to get the rest of this technical analysis series as it publishes.
Coming Up Next
Next week we'll cover Bollinger Bands, which wrap a moving average in a volatility measure a natural next step now that you understand the moving average that sits at the center of them.
This article is for educational purposes only and does not constitute financial or investment advice. The "ABC Corp" example is hypothetical. Always do your own research or consult a licensed financial advisor before making investment decisions.
