DecisionPoint

Exponential Averages: Sometimes the More Rational Choice

 | 

I was indoctrinated into using exponential moving averages (EMAs) out of necessity, back when I was generating data for the old DecisionPoint.com website. I was generating and maintaining data on Excel spreadsheets, and, if I wanted a 200-day simple moving average (SMA), I would need to keep 200 days of data. A corresponding EMA needed only two lines of data -- yesterday's and today's. Obviously, the EMA was the more practical choice, and I still prefer them over the SMA.

I don't want to get into a lesson on precisely how they are both calculated. Suffice it to say that EMAs are weighted toward recent price activity, whereas, with SMAs, the oldest data is equally weighted with the newest data. While my preference for EMAs was initially influenced by practicality, I recently saw an example of why EMAs can be more rational. A reader pointed out that the Nasdaq 100 50SMA had recently crossed down through the 200SMA (see below), which, considering the depth of the February-March decline, was surprising to me. It was also odd that, while price is well above the 50SMA, the 50SMA is still moving down. Also, the 200SMA never stopped rising, even when price went well below it.


Here's the same chart, but with EMAs. Note that EMAs always move toward price -- when price crosses the EMA, the EMA changes direction so as to keep moving toward price. To me, this is more rational behavior.


As investors we want to accomplish two basic things: (1) Determine the trend and condition of the market, and (2) select stocks that will ride that tide. The DecisionPoint Alert helps with the first step, and DecisionPoint Diamonds helps with the second. Go to DecisionPoint.com and SUBSCRIBE TODAY!


The purpose of moving averages is to smooth the data, to "summarize" its direction. Clearly SMAs accomplish this, but sometimes their behavior can be a bit mysterious, because past data dropping off the calculation string counts as much as what happened today.

Happy Charting! - Carl


Technical Analysis is a windsock, not a crystal ball.


Helpful DecisionPoint Links:

DecisionPoint Alert Chart List

DecisionPoint Golden Cross/Silver Cross Index Chart List

DecisionPoint Sector Chart List

DecisionPoint Chart Gallery

Trend Models

Price Momentum Oscillator (PMO)

On Balance Volume

Swenlin Trading Oscillators (STO-B and STO-V)

ITBM and ITVM

SCTR Ranking



Carl Swenlin
About the author: is a veteran technical analyst who has been actively engaged in market analysis since 1981. A pioneer in the creation of online technical resources, he was president and founder of DecisionPoint.com, one of the premier market timing and technical analysis websites on the web. DecisionPoint specializes in stock market indicators and charting. Since DecisionPoint merged with StockCharts.com in 2013, Carl has served a consulting technical analyst and blog contributor. Learn More
Subscribe to DecisionPoint to be notified whenever a new post is added to this blog!
comments powered by Disqus