Technical Analysis (TA) is nothing new in the world of trading and investing. From traditional investment portfolios to cryptocurrencies like Bitcoin and Ethereum, the use of TA indicators serves one simple purpose: to use existing data to make decisions that are likely to lead to higher returns. desired results. As markets have become increasingly complex, the past decades have seen the introduction of hundreds of different types of TA indicators, but the moving average (MA) is the most commonly used.
Although there are different variations of moving averages, their basic purpose is to make trading charts clear. This is done by smoothing the graphs to create an easily decipherable trend indicator. Because moving averages are based on past data, they are considered trailing indicators – in other words, they only show changes that have occurred. Even so, it still has a significant effect and helps to identify market trends.
Types of Moving Averages
There are different types of moving averages that can be used by investors not only in day trading and swing trading but also in long term setups. Although there are different types, MAs are usually divided into two distinct categories: Simple Moving Averages (SMAs) and Exponential Moving Averages (EMAs). Depending on the market and the desired outcome, investors can choose which indices are more likely to benefit their setup.
Simple Moving Average
SMA takes data from a time period and calculates the average price of coins from the dataset taken. The difference between the SMA and the basic average of past prices is that with the SMA, as soon as a new dataset is entered, the oldest data set is ignored. So, if the simple moving average calculates an average based on 10-day data, the entire data set will be continuously updated to include only the last 10 days.
It is important to note that all data inputs in an SMA are weighted equally, regardless of the time they were entered. For investors, who believe that using the latest data will better represent relevant information, often consider the equal weighting of the SMA to be detrimental to technical analysis. That’s why the exponential moving average (EMA) is created.
Exponential Moving Average
Like the SMA, the EMA provides technical analysis based on past price movements. However, it has a slightly more complicated equation because the EMA assigns more weights and values to the most recent price inputs. While both moving averages are valid and widely used, the EMA is more responsive to price fluctuations and reversals.
Since the EMA is able to predict price reversals faster than the SMA, it is often used by investors who make short-term trades. It is important for the trader or investor to choose the type of moving average according to his or her personal strategy and goals in order to adjust the settings accordingly.
Detailed instructions for using SMA
Detailed instructions for using the EMA
Compare SMA and EMA
The examples above are all about daily data, but that is not a requirement when analyzing MAs. Day traders may be more interested in a coin’s volatility over the past two or three hours, not two or three months. Different timeframes can all be included in the equations used to calculate the moving averages. As long as the timeframes included align with the trading strategy, that data can be useful.
One major drawback of MA is the time lag. Since MA is an indicator that goes after looking at previous price movements, the signals are often lagged. For example, an uptrend crossover might suggest buying, but this only occurs after a significant price increase. This means that even if the uptrend continued, potential profits could have been lost during the time of the bullish crossover and bullish crossover. Or even worse, a false gold cross can cause a trader to buy a top just before a drop (these fake buy signals are often referred to as bull traps).
Moving averages are powerful TA indicators and one of the most widely used. The ability to analyze market trends based on data gives insight into how the market is performing. However, be aware that MA and crossovers should not be used alone, but should be combined with different TA indicators to avoid false signals.
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