Moving averages help you ignore unnecessary daily price fluctuations and provide the necessary information to help you understand the big picture by showing how a token is currently trending in terms of support and resistance levels.
It is critical to know if you are in an upward or downward market and which levels must be kept or broken for reversal trend movements.
What is an exponential moving average (EMA)?
The EMA is a clear visual indicator you can use in technical analysis (TA) that evens out price data by creating an average price line of tokens’ recent price movements. It differs from other weighted moving averages in that it places more importance on recent price data; traders use it to discover price trends over time as it shows whether a market is trending upwards, downwards, or sideways.
There are two types of moving averages: simple moving average (SMA) and exponential moving average (EMA). The SMA calculates the average price evenly across a specific period. For example, you can select 15, 30 or 90 SMA, and it will calculate and draw the averaged line based on the specific days you chose.
The EMA, on the other hand, weighs the most recent price data. As a result, it is more likely to project price reversals faster than the SMA is. So, if you are a short-term trader, the EMA might just be the right tool for you.
This is especially relevant in crypto, where price movements are often volatile, and it is, therefore, essential to have a tool that emphasizes current price movements.
SMA versus EMA
Here is an example of how the SMA works:
At the time of writing, the average price of the BTC/USDT trading pair in the past five days is as follows:
Day 1: 30,000
Day 2: 31,000
Day 3: 30,500
Day 4: 30,700
Day 5: 31,500
SMA calculation: (30,000+31,000+30,500+30,700+31,500) / 5 (days) = 30,740
Our calculation shows that after five days, the average price was 30,740. This indicator would work well for a trader under normal circumstances. But if, for instance, the price of BTC dips to 28,000 USDT on the second day due to a crypto rumor that turns out to be a hoax, the five-day SMA would be as follows:
Day 1: 30,000
Day 2: 28,000
Day 3: 30,500
Day 4: 30,700
Day 5: 31,500
Thanks to this rumor, the SMA calculation would be: (30,000+38,000+30,500+30,700+31,500) / 5 (days) = 30,140.
In the second scenario, the SMA is much lower than in the first, even though the Day 2 price didn’t affect BTC’s price in the long run. This means the SMA mispresented the reality of the situation based on a single spike.
The EMA fixes such misrepresentation by giving more weight to the most recent prices observed. Even in the second scenario, the EMA would have placed more significance on days 3, 4 and 5 and thus, would have painted a more accurate picture of the moving average. Chart interfaces like the ones you see on Huobi calculate and draw the EMA automatically for you.
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