Question 1d

Advantage and disadvantage of Moving Average

The SMA is the most straightforward calculation, the average price over a chosen time period. The main advantage of the SMA is that it offers a smoothed line, less prone to whipsawing up and down in response to slight, temporary price swings back and forth. Therefore, it provides a more stable level indicating support or resistance.

Disadvantage

The SMA’s weakness is that it is slower to respond to rapid price changes that often occur at market reversal points. The SMA is often favored by traders or analysts operating on longer time frames, such as daily or weekly charts.

Advantage and disadvantage of Exponential Moving Average

The advantage of the HYPERLINK “http://www.investopedia.com/terms/e/ema.asp” EMA is that by being weighted to the most recent price changes, it responds more quickly to price changes than the SMA does. This is particularly helpful to traders attempting to trade intraday swing highs and lows, since the EMA signals trend change more rapidly than the SMA does.

Disadvantage

The concurrent disadvantage of the greater sensitivity of the EMA is that it is more vulnerable to false signals and getting whipsawed back and forth. The EMA is commonly used by intraday traders who are trading on shorter time frame charts, such as the 15-minute or hourly charts.

Advantage and disadvantage of Weighted Moving Average

A trader using a WMA is less likely to pick a trend change early but is also less likely to mistake a minor correction for a trend change. The advantage of using WMAs is that they pick up trends more quickly than simple moving averages. Some traders prefer to use WMAs for shorter time periods to capture changes quicker.

Disadvantage

The disadvantage of WMAs is that more false signals are likely to be generated than with simple moving averages. Some investors prefer simple moving averages over long time periods to identify long-term trend changes.