Weighted Moving Average vs Exponential Moving Average

Exponential Moving Average vs Simple Moving Average

Let’s analyse these two following types of moving averages: Weighted Moving Average vs Exponential Moving Average (Also known as WMA and EMA) . These two Moving Averages were created to solve a limitation of the Simple Moving Average: all the values of the Simple Moving Average have the same “weight” for the calculation of the average itself. Whereas in the Weighted Moving Average and Exponential Moving Average, the “weight” assigned to each value varies: is greater for the most recent values that are taken into account, while is lower for the oldest values.

These two moving averages, as the Simple Moving Average, are calculated over a period that you choose (It may be a period of 5 days or 10, 15, 20, 50, 100, etc …), and they follow the movement of the prices with a bit “of delay”. These moving averages help to smooth the movements of the Prices and to filter out the “noise” (All the oscillations of the Prices that create false signals) . Moreover, you should remember that the longer the Period of the Moving Average is, the more will be delayed on the movements of the Prices; although the longer the Period of the Moving Average is, the more false signals will be avoided.

Exponential Moving Average vs Simple Moving Average

Due to the particular calculations with which these Averages are created, if we put the Simple moving average and one of these Averages in the same chart, the Weighted or Exponential moving average will always be located above the Simple moving average during an Uptrend; whereas during a Downtrend, the Weighted or Exponential moving average will always be located below the Simple moving average.

Weighted Moving Average

 

Using this type of moving average, the latest values of prices taken into account, will have a greater “weight” than the oldest values. It works the same way as a Simple moving average.

Weighted Moving Average

So the weighted moving average during an Uptrend, will act as a support for the movements of the Prices; whereas during a Downtrend, will act as a resistance for the movements of the Prices.

Moreover, you should pay attention when the Prices cross the Weighted Moving Average. If the Prices break below (Go from above to below) the Weighted Moving Average, it’s a signal of decline in Prices. Whereas if the Prices break above (Go from below to above) the Weighted Moving Average, it’s a signal of rise in Prices. The difficult part of using the Moving Average is this one: to recognize the point in which the Prices cross the Moving Average and if this point is important or not for the movement of the Prices. (For this reason, it is recommended to use other oscillator-indicators, Candlestick Patterns of Patterns from the Technical Analysis, to have a further confirmation of the signals obtained from the moving average).

Exponential Moving Average

 

Using this type of moving average, the latest values of prices taken into account will have a greater “weight” than the oldest values. The Exponential moving average (EMA) uses a more complex calculation, thanks to which it seems to be more accurate than the other Moving Averages (But that not means that is the “best” moving average to use; you should try all the Moving Averages with different Periods, to find the one that seems to work better for you). It works the same way as a Simple moving average.

Exponential Moving Average

So the exponential moving average during an Uptrend, will act as a support for the movements of the Prices; whereas during a Downtrend, will act as a resistance for the movements of the Prices.

Moreover, you should pay attention when the Prices cross the Exponential Moving Average. If the Prices break below (Go from above to below) the Exponential Moving Average, it’s a signal of decline in Prices. Whereas if the Prices break above (Go from below to above) the Exponential Moving Average, it’s a signal of rise in Prices. The difficult part of using the Moving Average is this one: to recognize the point in which the Prices cross the Moving Average and if this point is important or not for the movement of the Prices. (For this reason, it is recommended to use other oscillator-indicators, Candlestick Patterns of Patterns from the Technical Analysis, to have a further confirmation of the signals obtained from the moving average).

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