Interpretation and use

Like simple moving averages, WMAs and EMAs smooth price action and are primarily used to highlight and define trends. The classic moving average-based definition of a trend is that an uptrend exists when a market is above its moving average and a downtrend exists when it is below its moving average. Longer moving averages (e.g., 50, 100 days) reflect long-term trends; shorter moving averages (e.g., five days, 10 days) reflect short-term trends.

The most basic moving average trend signal is the price crossover, which occurs when price moves from below a moving average to above it (signaling rising prices and an uptrend) or moves from above a moving average to below it (signaling falling prices and a downtrend).

Similarly, trend changes are also signaled by a moving average crossover, which occurs when a shorter-term moving average (say, 20 days) crosses above or below a longer term moving average (say, 60 days).

Moving averages are not always necessarily used to signal trades themselves: Many trading ideas are based on using moving averages to define trend direction, complemented by specific chart patterns that signal trades in the direction of the trend.

Some short-term traders favor EMAs and WMAs because they react to price shifts more quickly than the SMA, which makes them more useful for defining shorter-term trends and shorter-term trading approaches. Exponential averages especially are often favored by short-term traders who wish to have as smooth a moving average line as possible without experiencing too much lag.