Quickstart Guide to SMA and EMA for Crypto Trading
SMA and EMA are useful analytical tools to follow market trends and can indicate market entry or exit points. SMA stands for simple moving average, and EMA stands for exponential moving average.
The simple moving average is calculated by finding the average price of a coin for a certain number of periods (i.e. the bitcoin price over 20 days). When daily simple moving averages are graphed together over period of time, the SMA creates a line that smooths out the volatility of the coin and can show general market trends.
The exponential moving average is also the average price of the coin for a certain number of periods, but more weight is given to the most recent data, which allows the EMA to react faster to price changes and hug the actual price line a little closer.
The moving averages are useful for a couple reasons:
- If the averages are correctly applied, they can provide insights in market trends, such as confirming a market move or indicating the strength of a trend. But because the averages are based on historical data, they’re considered lagging indicators and can’t perfectly predict the future.
- By comparing two or more moving averages (i.e. one calculated with 5 days of data and the other with 20), the crossing of the averages can indicate market buy or sell signals. When a shorter-term average moves above a longer-term average, you can expect an uptrend in the market. If the shorter-term average moves below the longer-term average, it signals a downward movement in the market. By looking for the intersection between the two lines, you can determine buy or sell signals in the market.
As stated before, these indicators are based on historical data, so by the time they signal a market change, the time for entry has usually already past. The EMA is useful in these situations because it relies more on recent data and can therefore react to trend reversals more quickly.
While the EMA and the SMA are not perfect predictors of market trends, they can guide traders as they decide when to enter or exit the trading market.
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