Key points

Because they average price over time, all moving averages lag price action relative to the number of days used to calculate them. The goal of using a WMA or EMA is to reduce lag by emphasizing more recent price action. For the most part, the WMA tracks the price series most closely and responds most quickly to price changes, followed by the EMA and the SMA. However, increased responsiveness has drawbacks as well as advantages.

WMAs and EMAs, like SMAs, are subject to frequent whipsaws (when price crosses repeatedly above and below the average) in non-trending markets, or in any kind of market when the moving average is too short (and overly sensitive) to price fluctuations.

In late June price closed above the WMA and EMA –– a crossover that could be interpreted as a buy signal –– while remaining below the SMA. Price immediately turned back down. A similar pattern occurred near the end of the 10-minute chart.

One method to avoid excessive moving-average penetrations is to increase the length of the moving average.

However, this also decreases the average’s responsiveness, regardless of whether it is an SMA, WMA or EMA. Over time, though, the difference between using an SMA or an EMA becomes less significant. For example, every early response to a trend change by an EMA is likely to be balanced by a whipsaw that would not have occurred using an SMA. It shows a weekly chart with 26-week simple, weighted and exponential moving averages. As in the other figures, sometimes the responsiveness of the WMA and EMA is beneficial and sometimes it is a drawback.

Ultimately, the choice to use a particular kind of EMA must be based on testing and a trader’s experience with a particular trading strategy.

It shows some basic performance statistics for two tests of comparable simple, weighted and exponential moving averages. The first test compared the performance of 100-day simple, weighted and exponential moving averages as the basis of a moving average crossover system: The system went long when price crossed above the 100-day average and reversed position when price crossed below the average. The test spanned Dec. 7, 1999 to Dec. 8, 2004 in the euro/U.S. dollar rate (EUR/USD).

The second test traded the same system on 60-minute price bars of the U.S. dollar/Japanese yen rate (USD/JPY) from Oct. 28, 2004 to Dec. 8, 2004. The overall profitability for each type of moving average was the same in all the tests. In the daily EUR/USD test, the WMA produced the best results (meaning it lost the least money), followed by the SMA and the EMA. In the 60-minute USD/JPY test, the EMA performed best , followed by the WMA and the SMA..