Moving averages are always mentioned by those who practice Technical Analysis
. However, they are often put on the back burner in favor of other indicators. These use moving averages for their own charting like the RSI
discussed in the previous article
They are however extremely important for the beginner as well as for the experienced analyst: moving averages are as easy to understand as they are expressive as they are and they allow one to feel the basic laws of the market.
The simple moving average
The simple moving average is the most classical iteration of a moving average, its level is simply an arithmetic average of the last n prices. For a 20-period moving average, for example, it will be an average of the last 20 prices and so on.
The simple moving average is excellent for judging the strength of an ongoing trend. Indeed, visually a moving average takes the form of a line that can be seen on the chart. The steeper the line, the stronger the trend.
The simple moving average can also serve as support and resistance. The most common average for this is none other than the 200-day moving average, below which one can generally assume a bear market. Shorter-term
The exponential moving average
The exponential moving average differs from the simple average in that it gives more weight to the last quotation than to the more distant quotations. The exponential moving average, therefore, gives the impression that it is more closely related to prices than the simple average.
From a usage point of view, it can also be used as a resistance and support line. One of the most common uses is to cross a short moving average with a longer period. When a 50-period moving average crosses a 200-period moving average on the upside, it is called a golden cross.
SMA vs EMA: which one to choose?
Because of its more reactive nature, the exponential moving average is best used in a short-term trading context. A classic use could be the following: wait for a price crossing with the moving average to enter a position and wait for the opposite crossing to close the position.
Of course, this is only part of the strategy because as you know, you should always backtest your strategies yourself and a simple price crossing with a moving average will never be enough to be profitable.
For longer-term trading, a simple moving average can be used. You can also use both at the same time, the exponential moving average to trigger and the simple and longer-term moving average to filter.
There are many other types of moving averages and the best thing to do is to try them out for yourself. Once you have found your strategy, the most difficult step of all is to apply it, especially when there is a sudden change of trend.
Granted, manual crypto trading is not for everyone. It takes a lot of self-control, learning, and testing to be highly profitable. Is there a solution? Does this mean you should not get into crypto trading altogether? Definitely not!
With an automated trading system such as 4C Trading’s SMART Bots
, there will be no need for you to monitor the market nor would you ever be pressured into panic buying and selling; provided you do not get tempted and manually control the trading bots.