When carefully scrutinizing a stock or exchange traded fund chart, investors often follow the moving average as a valuable tool in guiding an investment strategy. However, investors may have noticed the slight variation between the simple and exponential moving averages.
The simple moving average (SMA) is the average price of a security over a specific period. For instance, the 50-day moving average is calculated by taking the last 50 day sum of closing prices and dividing by 50. The average is re-calculated as new data comes in, creating a “moving average.”
The exponential moving average (EMA) provides more weight to the most recent prices in an attempt to better reflect new market data.
The difference between the two is noticeable when comparing long-term averages.