Ask Colin

I need a couple of pieces of information: (1) the significance of the 22-day EMA. (2) Why use EMA instead of SMA? I notice that this is a major tool in your analysis; I assume it is based upon monthly moving averages.

The 22-day moving average is the number of trading days in the average month. I learned it from Dr Elder, for whom it has worked well for many years. I find it is best used on a fast moving and trending stock. Slower moving stocks and those that are not trending strongly tend to chop in and out of it too much.

The exponential moving average (EMA) is superior to the simple moving average (SMA) because it is unaffected by data leaving the look-back period, as is the case with a SMA. It is also a little more responsive to recent data. However, I am not really that fussed about it - I think a SMA will do the same job in most cases.

I only use the 22-day EMA for timing entries on a correction. The idea is that the EMA represents a consensus of value and stops me buying extremes of up trends. It is not a tool of analysis really, for me, but an entry mechanism. My approach is based on breakouts and trend analysis rather than moving averages. In my articles I write about all sorts of methods so that I cater to the wishes of all my readers. I choose the method that seems to give the best analysis or tactical leverage in each situation.