The simple moving average (SMA)
The simple average is the ordinary average from school: add the closing prices for a number of sessions and divide by how many there are. "Moving" means that each new session enters the calculation and the oldest one drops out, so the average travels with time.
The exponential moving average (EMA)
In an SMA every session carries the same weight. An EMA gives more weight to the latest prices. The formula: new EMA = old EMA + (new close − old EMA) × a factor. For a 5-session period the factor is 2 ÷ 6, about one third.
Continuing the example: if the old EMA was 10.44 and the new close is 11.5, the new EMA is 10.44 + 1.06 × 1/3 ≈ 10.79. The same session lifted the SMA only to 10.74, so the EMA closed in on the price faster.
Speed has a price, and so does calm
The length of the period matters as much as the type. A 20-session average describes the last few weeks; a 200-session average describes a much longer picture. There is no right or wrong period, only one that suits the question you are asking.
Compare the two yourself
Open any stock chart on FoudaLens, switch on SMA 20 and EMA 12 together, and watch which one turns first when price changes direction.
Check yourself
1. Three closes: 8, 9 and 10. What is the 3-session SMA?
2. Why does an EMA move faster than an SMA of the same period?
Summary
- An SMA is a plain average of recent sessions, each with equal weight.
- An EMA weights recent prices more, so it reacts faster and picks up more noise.
- An average describes past prices; its length decides whether it describes a short or long picture.