Types of Moving Averages - SMA, EMA, LWMA and SMMA

There are 4 types of moving averages:

1. Simple forex moving average
2. Exponential forex moving average
3. Smoothed moving average
4. Linear weighted moving average

The difference between these 4 moving averages is the weight assigned in to the most recent forex price data.

Simple Moving Average - SMA Indicator

Forex SMA indicator applies equal weight to the data used to calculate the simple moving average and is calculated by summing up the price periods of a chart & this value is then divided by the number of such price periods. For example forex simple moving average 10, adds the price data for the last 10 price periods and divides them by 10.

Exponential Moving Average - EMA Indicator

Forex EMA indicator applies more weight to the most recent forex price data and is calculated by assigning the latest forex price values more weight based on a percent P, multiplier that is used to multiply and assign more weight to the latest forex price data.

Linear Weighted Moving Average - LWMA Indicator

Forex LWMA indicator moving averages applies more weight to the most recent forex price data and the latest data is of more value than earlier forex price data. Linear Weighted moving average is calculated by multiplying each of the closing prices within the series, by a certain weight coefficient.

Smoothed Moving Average - SMMA Indicator

Forex SMMA Indicator is calculated by applying a smoothing factor of N, the smoothing factor is composed of N smoothing for N price periods.

The forex chart example below shows SMA, EMA and LWMA. The SMMA moving average is not commonly used so it is not shown below.

The LWMA indicator reacts fastest to price data, followed by the EMA and then the SMA.

SMA, LWMA, EMA - Types of Moving Averages - SMA, EMA and LWMA

Day Trading Forex with Exponential and Simple Moving Averages

The SMA and EMA moving averages are the most commonly used Moving averages to trade forex. Whereas the EMA moving average has a more sophisticated method of calculation, its more popular than the SMA moving average.

Simple Moving Average is the arithmetic mean of the closing prices in the price period based on the set time period where each time period is added and then it is divided by the number of time forex price periods chosen. If 10 is the price period used the price for the last ten forex price periods added up then it is divided by 10.

SMA indicator is the result of a simple arithmetic average. Very simple and some traders tend to associate with the trend since it closely follows forex price action.

EMA on the other hand uses an acceleration factor and it is more responsive to the trend.

The SMA moving average is used in forex charts to analyze forex price action. If the price action in more than 3 or 4 time forex price periods the SMA then its an indication that long forex trades should be closed immediately and the bullish momentum of the buy forex trade is waning.

The shorter the SMA price period the faster it is to respond to forex price change. SMA indicator can be used to show direct information regarding the trend of the market and the strength by looking at its slope, the steeper or more pronounced slope of the SMA is, the stronger the trend.

The Exponential Moving Average is also used by many traders in the same way but it reacts faster to the market moves and therefore it is more preferred by some forex traders.

The SMA and EMA can also be used to generate entry and exit points when forex trading. These Moving averages can also be combined with Fibonacci and ADX indicators to generate confirmation the signals generated by these moving averages.