For those who missed. The first and second part of a series of articles about cryptocurrency trading read here and here.
Relatively debt period of time traders are most interested in the collective picture of the price movement. It is in all its glory show moving averages lines (Moving Averages or MA).
Sometimes MA can serve as dynamic levels of support/resistance, and their behavior helps to predict the likely path of prices in the future. There are two types of moving averages: SMA and EMA. The full description filed with Coindesk.
Simple Moving Average (SMA)
SMA is one of the simplest technical indicators, this tool is used by both experienced and novice traders. On the chart the SMA is calculated automatically by summation of the previous closing prices over a certain period. The period most often indicated by the number in front of the indicator name.
So, let’s take the 5 SMA on the 1-day chart. To calculate the indicator points you need to take the average of the closing prices for the previous five days. Days before the specified period do not count. The calculation is necessary only for understanding the principle of operation of the indicator, so that in the future you could find a suitable period SMA in your trading strategy.
What is the use moving average? It shows the main movement of an asset at a certain time interval. If you have difficulty with the definition of a trend cryptocurrency, just turn on the display SMA on the chart.
When configuring SMA note a few features of the indicator:
- the greater period moving average, the slower it reacts to price movement;
- SMA with a long period give a secure acknowledgement to the change trend;
- SMA tend to pacowta (false movements) with a sharp price jumps.
The essence of the latest features? When there is a sharp price jump, SMA starts to behave as if soon there will be a change of trend. In fact, the trader can easily fall into the trap if you fall for fakeout. To recognize such Takeuti, you need to use the exponential moving average.
Exponential Moving Average (EMA)
EMA eliminates facuty due to the special light of the recent closing prices. The factor that determines the “importance” of the recent time periods is determined by a special multiplier.
Multiplier = (2 / (period + 1))
Accordingly, the influence of faauto falls almost to zero.
However, to understand the complexities of counting EMA is not necessarily — for all you do computer. You only need to understand the features of the unit time period.
The chart on cryptocurrency EMA, usually lying close to the price. Line responds well to the price movement and gives you the opportunity to quickly make a decision about opening a position.
SMA vs. EMA
Among the two types of moving averages there is no better — every trader chooses their own trading strategies. For example, within the day it is best to use EMA with a short period, as the line reacts faster to the change of the trend. And the faster you can “jump on the train”, the more it turns a profit.
On the other hand, during the regeneration phase accumulation EMA may give a false idea about the formation of a new trend. Then the trader will simply fall into a trap and will be forced to close the position in minus.
SMA with a large period are good dynamic support levels. However, a simple moving average is often late with the trend, so trading with it, you can’t pass up a good entry point.
The best strategy is to use SMA and EMA. Both lines will help to get an idea of the situations in which it is better not to get into trades. Or, on the contrary, when it is better to open a position.
The simple purpose of SMA is to identify the trend. Here works the same rule as that of trendline — if the price is above the line then the trend is upward. Otherwise, the asset is in a downtrend.
As with trendline, SMA can cause peakauto. If the price crosses the line, that’s not a reason to open a position. For confirmation of a trend change it is better to use multiple SMA with different period. Recall, the smaller the period, the closer the line is to the graph.
For example, if 10 SMA remains above its 20 SMA, then the uptrend remains in force. Otherwise it may happen the intersection of the moving averages (crossover). This event is considered the most favorable for trading decisions.
How to use crossover
Consider the chart of Bitcoin from mid-July to September. During this time, between the 21 SMA and the 55 SMA has happened several crossovers. They were all good signals of a trend change. The first intersection after the 16 July was the beginning of local bullrun. The second intersection is the start of a downtrend that lasted almost a month.
Finally, the third happened after a sharp fall of Bitcoin from 7400$. Here you can see the imperfection of the instrument. Most traders agree that the crossover is a lagging indicator, meaning it delivers a signal after the event occurred.
Therefore, to determine trends in this time interval is best to use a MA with a small period. They quickly react to the change of the price movement. From the moving average with a large period has a purpose — showing dynamic levels of support and resistance.
Everything here as simply as possible — leave on the chart, for example, a 100 SMA and look at price behavior relative to the line. As a rule, moving averages with higher period are a good reversal zones or support the trend.
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