Moving averages is a popular trading tool. It relies on historical prices to smoothen out the price data and indicate the current price direction trend.
They also form the basis for other technical overlays and indicators like McClellan Oscillator, MACD, and Bollinger Bands.
Basically, there are two types of moving averages, Exponential Moving Average (EMA) and Simple or Smoothed Moving Average (SMA). For a positive impact on trading, the trader needs to choose the correct moving average.
‘Reaction Speed’ to price movements is the only distinction between the two. EMA moves and changes directions faster than SMA.
EMA deems the latest price action more important, hence even a slight change in price direction is recognized by it sooner. Whereas, SMA reflects the price action a bit later.
Though EMA reacts sooner to change in price directions, it is more susceptible to wrong deductions and wrong conclusions, especially in cases of short-lived and untrue price movements.
Because SMA moves slowly, your trading time gets reduced accordingly.
Ideally choosing one over the other depends on what kind of trader you are and what you are comfortable with.
But my recommendation would be to use the type of moving averages that are being most commonly used by all the other traders.
For Example, a Day-Trader needs a fast reacting moving average. EMA would, therefore, be perfect for them.
On the other hand, Swing Trading is done in a higher time frame and for a longer period of time. Hence, SMA would be the ideal choice for swing traders.