Charting: why does an SMA/EMA change when...

[YoshihiroUK]

Hello

I am looking to better understand why when I zoom from a 1 year, daily chart down to a 1 month, 2 hour chart, the EMA/SMA changes.

For example, the 20 day EMA can be above the 120 day EMA on the 1 year, daily chart although after switching to the 1 month, 2 hour chart, the 20 day EMA is then below the 120.

Can anybody help me to better understand why this is? I know that zooming into the chart will change the perspective although I don't know the exact cause of the change in position of the EMA.

Thank you

 

[Ivan88]

A default 120 period MA (be it SMA/EMA) is calculated from the last 120 bars - so a daily chart uses the last 120 days, whereas for a 2hr chart the last 120 2-hr bars - hence the data period from which the MA is calculated is totally different. A 120 day MA will give you a longer time frame trend than a 120 2-hr MA.

Some charting packages allow you to draw MA's on the chart for a different time frame than the chart - i.e. a 120 period weekly MA could be drawn on a daily chart. In this case the MA could not change as you zoomed into the chart.

Hope this is clear.

 

[YoshihiroUK]

Thanks for explaining that Ivan. In summary, if I wanted to follow the 120 day period (for a longer time frame trend) then I would ignore the 120 x 2 hour period, for example.

Appreciated.

 

[NVP]

EMA's will not be in the same consistent position on different timeframes

SMA's will

N

 

[darktrade]

Because of the way the EMA it is calculated, it is initial value dependent. If you allow long periods, the values converge. The same problem is there with the RSI (many do not know that). Read this and you will see why:

Relative strength index - Wikipedia, the free encyclopedia

 

[Vicorka]

Thanks for explaining that Ivan. In summary, if I wanted to follow the 120 day period (for a longer time frame trend) then I would ignore the 120 x 2 hour period, for example.

Appreciated.

It is good to start learning TA from MAs. Yet, I do not trade them and I do not recommend to rely solely on them.

There are 2 problem:
1. Lag
2. Does not take into account volatility

Because of these two problems, there are periods when it works and when it fails. If you plot 120 and 20 MAs on S&P 500 you will see that, yes, it spots strong trends, however, there are periods when side-way choppy trading will eat all previously earned profit (check July 2011- January 2012 for the S&P 500).

It does not mater whether you use SMA, EMA, MACD, TRIX or any other indicator solely based on MA, the result is the same - there will be financially suicidal periods of choppy trading.

Before putting any money on MAs, check MACD (two MA is MACD) scan results from free source at
MACD Trading Systems
(Skip AAPL results as a few long trades on constantly bullish stock cannot evaluate MACD)