What is a moving average?
Moving averages are often used by quant traders for technical analysis to determine price trends as well as areas of support and resistance. An n-period moving average is derived from the average prices of the previous n periods. For instance, a 15-Day moving average is a simple average of cryptocurrency’s price over the previous 15 days. This moving average provides traders with a clearer indication of a cryptocurrency’s price trend by smoothing out daily price fluctuations.
However, the simple moving average is a lagging indicator – meaning it only shows a trend AFTER it has happened – due to it relying on past prices for inputs.
Moving Averages vs Exponential Moving Averages
Due to the inherent time lag in simple moving averages, many traders prefer to use exponential moving averages (EMA), which places a greater weight on more recent prices. The increased weightage of recent prices allows the indicator to be more sensitive to recent price changes. Thus allowing changes in price trends to appear on an EMA chart before a MA chart. This is especially important for large sudden changes in price that may be indicative of a reversal.
In the image above, it can be seen that the EMA coloured in yellow was able to reflect a change in price trends before a simple MA coloured in blue. This earlier detection of price trend changes allows for the automated trades to be more responsive to price changes in the short term.
Moving averages of different lengths
Apart from the differences between the types of moving averages, the timeframe used in calculating the moving averages will also provide a different inference of the price trend. Moving averages utilizing a longer timeframe are generally considered to be more reliable for showing longer-term price trends. However, they are also less responsive to short term fluctuations in prices compared to shorter-term moving averages.
This difference in responsiveness between long and short term moving averages allows traders to observe changes in price trends when the short term moving average crosses the long term moving average as outlined in CryptoHero’s documentation.
In the diagram above, it can be observed that the shorter term 20-Day EMA coloured in red crossed above the 50-Day EMA coloured in orange BEFORE the 50-Day EMA crossed above the 100-Day EMA coloured in blue. The earlier entry signal would have potentially allowed the trader to enter a profitable trade earlier than another trader using a longer-term EMA.
However, the decision of specific timeframes and type of moving averages are up to an individual trader’s preference and there are no fixed rules on which type of moving average or time frame is superior.
In the equities markets, traders often use the 50-Day and 200-Day exponential moving averages to determine the price trends of stocks. A golden cross is a bullish BUY signal that is generally described as the situation where the 50-Day moving average crosses ABOVE the 200-Day moving average. Conversely, a Death Cross is a bearish SELL signal observed when the 50-Day moving average crosses BELOW the 200-Day moving average.
Moving averages are one of the technical indicators used by CryptoHero to help users automate cryptocurrency trading. In this article, we have briefly described what the types of moving averages and how they are used in Cryptocurrency trading.
Over here at CryptoHero, we understand that deciding on specific EMA time periods is a daunting task for many traders new to automated Cryptocurrency trading. As such, CryptoHero utilises the 9-Day and 50-Day EMA as default settings to remove the hassle for users.
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