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Do you want to profit from trading cryptocurrency? Then let's get acquainted with one of the technical analysis tools such as Moving Averages.
Moving averages and how to use them
You would need to study technical analysis indicators to be able to succeed in the crypto market. Moving Averages is one of these useful indicators (MA). Hundreds of indicators have been developed in technical analysis over the years. Moving averages, on the other hand, are regarded as one of the most dependable, objective, and valuable instruments.
What is it?
The Moving Average is the most common and, probably, one of the first indicators that a trader encounters when learning the fundamentals of trading. Moving Average is a trend indicator that shows the average value of the price of the selected currency pair over a given time. Moving Average indicator can be used to expose market trend direction, get trading indications on transaction beginning, and filter “noise,” i.e. tiny price variations. The moving average is superimposed on the price chart, and trading decisions are based on where it is concerning the price.
Indeed, the MA’s primary function is to smooth out the information presented by the chart by identifying the asset’s general trend. The MA line is just another way to validate the direction of an asset’s price movement; it can also indicate a shift in trend as well.
Types of MAs
Regardless of their variety, MAs are often divided into two types: simple moving averages (SMAs) and exponential moving averages (EMAs). Traders can choose whatever indicator is acceptable and will profit from its installation based on the market and the intended outcome. Use any sequential data collection, including opening and closing prices, maximum and minimum prices, trade volume, or other indicator variables to build the Moving Average. The only thing that distinguishes different forms of Moving Averages is the weight factors allocated to the most recent data. In the case of Simple Moving Average, all prices over the time in question are equally weighted. The latest prices are given more weight in the Exponential Moving Average.
Simple Moving Average (SMA)
SMA is a simple arithmetic moving average that differs from other MAs in that it has a different weighting factor that is assigned to its last indicators. These are the values of a period that are evaluated with equal weight. SMA generates a significant value in the form of the average value over a certain time.
Exponential Moving Average (EMA)
The EMA’s enhanced sensitivity to recent price fluctuations benefits traders who want the moving average to lag less in recent price swings. The disadvantage of employing the EMA is that it raises the likelihood of misleading or premature trade signals because it generates more trading signals. Moreover, traders frequently use a variety of EMA durations, including 10-day, 50-day, and 200-day moving averages.
How to use it on bit4you?
It is simple to use Moving Averages on the bit4you trading platform in the calculation of a consecutive data set, including opening and closing prices, maximum and minimum prices, trading volume, or values of other indicators.
The principle of building a moving average is very simple – the indicator calculates the average price over a certain elapsed time and draws a line. The time interval is calculated in bars (candles), which you specify in the settings. On the bit4you website, you just need to click on the asset you are interested in and there is a price chart for the particular timeframe. Then, click on the Indicators button above the chart and select Moving Averages among other technical indicators.
Further, there you can see the longer the time range, the stronger the signal. According to the illustration below, we can interpret a price-moving average by comparing its dynamics to the price’s dynamics. If the fast (green) MA crosses the slow (red) MA from bottom to top on the graphs, it signals a golden cross, indicating an entry into the market. If the blue MA crosses the red MA in the opposite direction – from the top down – it is a signal of the death cross, which indicates that the position should be closed. In other words, when the instrument price climbs above the MA, it gives a buy indication; when it falls below the indicator line, it is a sell signal. Because MA is customizable, the strength of the signal is determined by the time frame and length of the MA.
We calculate Simple Moving Average (SMA) by adding the closing prices of each candle for a given number of periods and dividing the result by the number of periods. SMA = SUM (CLOSE (i), N) / N
Where: SUM is the amount, CLOSE (i) is the closing price of the current period and N is the number of periods.
The formula for Exponential Moving Average (EMA) is EMAt= a*Pt+(1-a)*EMAt-1
Where: α is a weighting coefficient with a value between 0 and 1 that reflects the rate of aging of past data: the higher its value, the greater the specific weight of new observations of a random variable, and the lower the old ones;
Pt is the random variable’s value at time t;
EMAt-1 is the value of EMA in the period (t-1).
In conclusion, the MA is a very helpful and popular technical analysis indicator that allows traders to detect the uptrend and decline. Before trading, we also recommend using MA at multiple timeframes and in conjunction with other indicators.