Understanding Exponential Moving Averages vs. Simple Moving Average
Exponential Moving Average (EMA) and Simple Moving Average (SMA) are very similar as they both measure market trends. Both averages are interpreted in the same way and they are very popular amongst crypto traders to help smooth out the price fluctuations that happen in such volatile markets like Bitcoin or Ethereum. We have covered Simple Moving Averages before on our blog, and I encourage you to read through our articles covering different trading strategies - no matter what level of crypto trader or user you may be.
One indicator we have not covered in detail is an Exponential Moving Average (EMA). As it is one of the most popular indicators available to cryptocurrency traders, you will surely find it being discussed on various media outlets or any technical analysis that tries to answer the big question: are the Bitcoin bulls back? The next Bitcoin halving is now only 100 days away which historically has been the cause of big price movements for BTC.
Difference between EMA and SMA
The formula to calculate an asset's moving average is done by calculating the sum of closing prices from a defined number of trading periods (usually days) and then dividing the sum by the number of trading periods. A 20-day MA is calculated by taking the closing prices from the past 20 days and then dividing the sum by 20. This is why you see crypto price analysis using several moving averages such as SMA9, SMA20 or SMA200 to pinpoint their crossovers as an indicator of when to enter and exit markets.
A crossover trading strategy is the same for any moving average, where crossovers indicate a change in the market's momentum, one we have covered in detail in the following article:
Exponential Moving Averages
An EMA is simply an moving average with a different distribution curve, one that places more weight on recent trading periods. This means an EMA is faster to react to sudden price changes, something we all know happens regularly in crypto markets meaning it is a useful indicator for trading breakouts.
Should you be using SMAs or EMAs?
It comes down to your individual trading strategy, if you are using moving averages calculated from short periods because you prefer to make a higher amount of trades. Maybe you are day trading and trying to catch every dip? Well then you probably do not have to give much thought to which moving average you use, for example, here is a recent Bitcoin chart with a 20-day SMA and EMA.
Notice how they are providing you with extremely similar data (a few dollar or cents difference) and pretty much look the same. Which is why for day trading crypto, you should add in other indicators simultaneously with your moving averages such as Relative Strength Index and Stochastic Oscillators.
Now the big difference is when your trading strategy is based off long term trends, for example, maybe you are buying Bitcoin when the price goes over a 200 day average to catch bullish market movements and selling when the inverse happens.
Looking at our recent Bitcoin/USDT chart if your indicator for the proposed strategy was an EMA200 then you could potentially have bought in around January 8-13th when BTC was trading at ~$8,140 and if your indicator was an SMA200 then you would have bought in January 28th-30th at around ~$8,900.
So as you can see if you are a trader that likes to look at a longer term perspective then you should give a lot more consideration to which average you use because the values vary to the point that it will be influential on your realized returns. Of course, like all technical indicators, there is not one average that will guarantee success.
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