August 14, 2019

What Is the Difference Between a Simple and an Exponential Moving Average?

Moving averages are used to pinpoint trade areas, to identify trends, and to analyze markets. Moving averages help traders isolate the trend in a security, or the lack of one, and can also signal when a trend may be reversing. Two of the most common types are simple and exponential. We will look at the differences between these two moving averages.

Simple Moving Average

To calculate a 10-day simple moving average (SMA), add the closing prices of the last 10 days and divide by 10. To calculate a 20-day moving average, add the closing prices over a 20-day period and divide by 20.

For example, given the following series of prices:
\$10, \$11, \$11, \$12, \$14, \$15, \$17, \$19, \$20, \$21
The SMA calculation would look like this:
\$10+\$11+\$11+\$12+\$14+\$15+\$17+\$19+\$20+\$21 = \$150
10-day period SMA = \$150/10 = \$15

Exponential Moving Average

The exponential moving average (EMA) focuses more on recent prices than on a long series of data points, as the simple moving average required.

The most important factor is the smoothing constant that = 2/(1+N) where N = the number of days.

A 10-day EMA = 2/(1+10) = 0.1818
For example, a 10-day EMA weights the most recent price at 18.18 percent, with each data point after that being worth less and less. The EMA works by weighting the difference between the current period’s price and the previous EMA and adding the result to the previous EMA. The shorter the period, the more weight applied to the most recent price.

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

May 8, 2024

What Is Delta In Options Trading?

Understanding the Delta of an option is crucial for both new and seasoned traders. It’s one of five specific calculations called “Greeks,” which help measure specific factors that could influence the price of an options contract. Delta is a metric that helps you gauge how much the value of an option contract is expected to […]

March 28, 2024

Wait! There Is An Options Greek Called Rho?

Out of all the Greeks in options trading, Rho is capable of providing uniquely critical insights that others cannot offer. Rho measures an option contract’s susceptibility to changing interest rates. We’ll explain how Rho by defining its specific functions, how interest rates impact options trading, and cover some pertinent scenarios. What is Rho in Options […]

March 25, 2024

You Have A Lot Of Options Out There

There are a number of different types of options expiration types.  In the vast majority of our signals, our options will be categorized as “American”-style options.  There are some, like VIX options, that are “European”-style options.  Here’s a quick explanation of both. The term “American style” in relation to options has nothing to do with […]

May 8, 2024

What Is Delta In Options Trading?

Understanding the Delta of an option is crucial for both new and seasoned traders. It’s one of five specific calculations called “Greeks,” which help measure specific factors that could influence the price of an options contract. Delta is a metric that helps you gauge how much the value of an option contract is expected to […]

March 28, 2024

Wait! There Is An Options Greek Called Rho?

Out of all the Greeks in options trading, Rho is capable of providing uniquely critical insights that others cannot offer. Rho measures an option contract’s susceptibility to changing interest rates. We’ll explain how Rho by defining its specific functions, how interest rates impact options trading, and cover some pertinent scenarios. What is Rho in Options […]