As we said in the previous lesson, simple moving averages can be distorted by spikes. We’ll start with an example.

Let’s say we plot a 5-period __SMA__ on the daily chart of EUR/USD.

The closing prices for the last 5 days are as follows:

Day 1: 1.3172

Day 2: 1.3231

Day 3: 1.3164

Day 4: 1.3186

Day 5: 1.3293

The simple moving average would be calculated as follows:

(1.3172 + 1.3231 + 1.3164 + 1.3186 + 1.3293) / 5 = 1.3209

Simple enough, right?

Well, what if there was a news report on Day 2 that causes the euro to drop across the board.

This causes EUR/USD to plunge and close at 1.3000. Let’s see what effect this would have on the 5 period SMA.

Day 1: 1.3172

Day 2: **1.3000**

Day 3: 1.3164

Day 4: 1.3186

Day 5: 1.3293

The simple moving average would be calculated as follows:

(1.3172 + **1.3000** + 1.3164 + 1.3186 + 1.3293) / 5 = **1.3163**

The result of the simple moving average would be a lot lower and it would give you the notion that the price was actually going down when in reality, Day 2 was just a one-time event caused by the poor results of an economic report.

The point we’re trying to make is that sometimes the simple moving average might be *too* simple.

If only there was a way that you could filter out these spikes so that you wouldn’t get the wrong idea. Hmm… Wait a minute… Yep, there is a way!

It’s called the **Exponential Moving Average**!

Exponential moving averages (EMA) give more weight to the most recent periods.

In our example above, the EMA would put more weight on the prices of the most recent days, which would be Days 3, 4, and 5.

This would mean that the spike on Day 2 would be of lesser value and wouldn’t have as big an effect on the moving average as it would if we had calculated for a simple moving average.

If you think about it, this makes a lot of sense because what this does is it puts more emphasis on what traders are doing recently.

Let’s take a look at the 4-hour chart of USD/JPY to highlight how a simple moving average (SMA) and __ exponential moving average__ (EMA) would look side by side on a chart.

Notice how the red line (the 30 EMA) seems to be a closer price than the blue line (the 30 SMA).

This means that it more accurately represents recent price action. You can probably guess why this happens.

It’s because the exponential moving average places more emphasis on what has been happening lately.

When trading, it is far more important to see what traders are doing NOW rather than what they were doing last week or last month.

Lesson 6: What is a Japanese Candlestick? Lesson 7 :Japanese Candlestick Anatomy Lesson 8:Basic Japanese Candlestick Patterns Lesson 9: Single Candlestick Patterns Lesson 10: Dual Candlestick Patterns Lesson 11: Triple Candlestick Patterns Lesson 12:Japanese Candlestick Cheat Sheet Lesson 13: Candlesticks with Support and Resistance Lesson 14: Common Mistakes That New Traders Make With Japanese Candlesticks Lesson 15: Summary: Japanese Candlesticks

Lesson 16 : Fibonacci Trading Lesson 17: How to Use Fibonacci Retracements Lesson 18: Fibonacci Retracements are NOT Foolproof Lesson 19: How to Use Fibonacci Retracement with Support and Resistance Lesson 20: How to Use Fibonacci Retracement with Trend Lines Lesson 21: How to Use Fibonacci Retracement with Japanese Candlesticks Lesson 22: How to Use Fibonacci Extensions to Know When to Take Profit Lesson 23: How to Use Fibonacci to Place Your Stop so You Lose Less Money Lesson 24: Summary: Fibonacci Trading

Lesson 25: What Are Moving Averages? Lesson 26: Simple Moving Average (SMA) Explained Lesson 27: Exponential Moving Average (EMA) Explained Lesson 28: Simple vs. Exponential Moving Averages Lesson 29: How to Use Moving Averages to Find the Trend Lesson 30: How to Use Moving Average Crossovers to Enter Trades Lesson 31: How to Use Moving Averages as Dynamic Support and Resistance Levels Lesson 32: How to Use Moving Average Envelopes Lesson 33: How to Analyze Trends With Moving Average Ribbons Lesson 34: How to Trend Trade with Guppy Multiple Moving Average (GMMA) Lesson 35: Summary: Using Moving Averages

Lesson 36: How to Use Bollinger Bands Lesson 38: How to Use the MACD Indicator Lesson 37: How to Use Keltner Channels Lesson 39: How to Use Parabolic SAR Lesson 40: How to Use the Stochastic Indicator Lesson 41: How to Use RSI (Relative Strength Index) Lesson 42: How to Use Williams %R (Williams Percent Range) Lesson 43: How to Use ADX (Average Directional Index) Lesson 44: Ichimoku Kinko Hyo Lesson 45: Trading with Multiple Chart Indicators Lesson 46: What is the Best Technical Indicator in Forex? Lesson 47: Summary: Popular Chart Indicators