Identifying SMA Turn Points Ahead of Time

I was recently discussing EMA vs SMA with a trader who uses moving averages as a component of his analysis.  (Note: EMA = exponential moving average; SMA = simple moving average)

Specifically, one part of his methodology requires the identification of a turn of a short-term average against the trend to indicate a weakening of that current price swing.

I suggested that my preference in this case would be an SMA simply because the easier mathematics allows us to see in advance exactly at which price level the current candle would need to close at or beyond, in order to turn the average line.

He wasn't aware of this concept, so it's quite likely many others aren't as well. So let me share the idea here. I'm all about "keeping your mind ahead of the current price" and this technique allows you to do exactly that. You'll know ahead of time, exactly where price needs to go in order to change the SMA slope.

It's commonly believed that EMA's are superior to SMA's, simply because they're more responsive to price change and will adapt to movement quicker. While there is some validity to this, really SMA and EMA and all other indicators are just a tool. You really need to ask what you're trying to indicate. Then seek out the tool that best provides you with a solution.

Anyway… here's the thing with EMA vs SMA as it relates to "identifying in advance the point at which the slope will change":

And it takes about a second to know this. With no mathematics at all.

Let's look now just at the SMA as we move forward bar by bar.

Why?

Well, if you're a maths nerd like me, work it out! (It's pretty simple… each time we move forward one candle, one closing price is dropped out of the average formula and the current one is added. Play with the figures… you'll see it simply enough).

If you're not a maths nerd, don't worry about it. Just look at some charts and count back the bars to prove to yourself that it works.

Lance Beggs


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