Good day everybody,

Welcome to CryptoGod-1's blog on all things crypto. Today we are going to look at Technical Analysis and why it can be such an important asset for new or experienced traders. Originating back in the 20th century and primarily used for Stock Market trading, it can be just as easily applied and used when trading cryptocurrencies. I plan on doing a series looking at some of the different Technical Analysis and Indicators which can be used to help determine market movement and sentiment when trading. For Part I the focus will be on Exponential Moving Average (EMA).

 

Exponential Moving Average (EMA)

The exponential moving average (EMA) is one of the most commonly referred to types of Technical Analysis (TA) and it is a type of moving average which places a greater weight and significance on more recent data points. It can also be referenced as the exponentially weighted moving average, and reacts more significantly to any recent changes in price compared to a simple moving average. In the same manner as most moving averages are used, the EMA can produce buy and sell signals based on crossovers and divergences from the historical averages. It can also be used in different ranges, with some of the more common EMA's being the 10, 50, and 200 moving averages. When applying an EMA on your trading chart, users have the choice for a smoothing factor, with the most common choice often being 2. By choosing this, it give the most recent observation more weight, while if a user decides the smoothing factor needs to be increased, the most recent observations have a greater influence on the EMA.

 

 

Calculating an EMA

To calculate the EMA it is achieved by taking the sum of the candles during the set time period, for example a 200 EMA takes the sum of the previous 200 candles closing price. These observations are then divided by the EMA number, so 200 in this case. An example on a 1 day trading chart of a 20 EMA would be the sum of the closing prices for the past 20 trading days, divided by 20. To apply the smoothing multiplier for the EMA, the multiplier for the above example would be [2/(20+1)]= 0.0952. So the formula used to calculate the EMA is:

 

• EMA = Closing price x multiplier + EMA (previous day) x (1-multiplier)

 

The EMA gives a higher weight to recent prices, meaning the weighting given to the most recent price is greater for a shorter-period EMA than for a longer-period EMA. For example, an 18.18% multiplier is applied to the most recent price data for a 10-period EMA, while the weight is only 9.52% for a 20-period EMA. Variations can also be applied to the EMA by using the open, high, low, or median price instead of using the closing price.

 

 

How to use an EMA

Generally a trader uses an EMA alongside another indicator to confirm the trend of the market, significant market moves and to gauge their validity. For day traders the EMA indicator can be very beneficial in fast moving markets, and is used to reaffirm a trading bias. If the EMA is showing an upward trend you can assume a long strategy is a viable option, while a downwards trend would indicate a short strategy. A solid strategy is that when the candles are above the 200 EMA the market is trending upwards, while when they are below it the market is leaning more towards being bearish. When the price crosses the 200 EMA, it is generally taken as an indicator that a reversal has occurred. 

 

Below are two example of a ATOM/USDT trading chart from Binance in the 15 minute and 4 Hour timeframes. I have applied a number of EMA's to the charts to demonstrate how they can indicate the trend and movement of an asset, and to show the difference in each EMA when they are given longer or shorter time periods. All have been used with a smoothing factor of 2. 

Pink: 500 EMA

Yellow: 200 EMA

Blue: 100 EMA

Orange: 56 EMA

Green: 10 EMA

 

 

The difference is quite obvious with both, as you can see how rapidly the 10 EMA follows the candles, while the 500 and 200 EMA show minimal change in their direction. Another key thing to note is that while on the 15 minute chart it clearly shows an uptrend in direction, the 4 hour chart is only beginning to show a change is direction of the EMA's. This is why it is always important to view charts on different time frames, or to zoom out so to speak. It can help to show the longer term trends in this way. To get very long term trend periods the 12 hour or 1 day charts are also highly recommended. The EMA's can also be a good indicator of where a price needs to break to change a trend. As seen on the 4 hour chart the candles broke above the 200 EMA before crashing back down. They did not close above the 200 EMA which is a notable in a fake trend reversal. The price dropped again before later rising above the 200 EMA and closing above it. The following two candles also dropped before having a strong close above, to signal a trend reversal. As you can see the next candle hit the 500 EMA, which can be a good target if you are trading derivatives, although you cannot solely rely on the EMA's as definitive price targets, like in anything with trading they are just indicators.

 

 

 

Limitations of an EMA

The EMA relies on historical data, meaning that if markets are efficient then the use of historical data would not in fact tell us anything about the future direction of the market. At the same time it is not clear whether placing a higher emphasis on recent days in the time period will yield more accurate results. Some traders rely on new data, while others feels placing too much weight on recent dates creates a bias that leads to more false alarms.

 

 

Conclusion on using an EMA for TA

As a trader, whether it be day trading or long term trading, using an EMA can be very beneficial in understanding when is a good time to buy and when to sell. It is achieved by calculating the average price over a specific time frame, meaning it can be used as an indicator to show whether the current price is moving in an upwards or downwards direction. Through using different timeframes for the EMA, and for the charts, a user can get a clearer pattern of the recent or long-term trend of the market.

As stated above, whether you are experienced or new, Technical Analysis can always be a useful asset when trading. Just remember it is not guaranteed and nobody can predict the future, no matter how certain you believe the patterns to be. It is always just another tool of the trade to help make more informed decisions when trading, but it is easier to get caught in a trap with a shorter term EMA with its rapid fluctuations in direction. Always zoom out, if trading on a 15 minute chart check the 1 hour or 4 hour or even 1 day chart to give you a better idea of the overall trend direction. EMA's can be good targets for noting trend reversals and price point targets when trading.

 

I hope this post was beneficial and of some use, and I plan on continuing the series with the next instalment focusing on the relative strength index (RSI). Of course each technical analysis provides different beneficial information, so combining your most trusted and favourite ones can be the best strategy for finding entry and exit points when trading.

Have a great day.

Peace. CryptoGod-1.

 

Referral links:

Publish0x - https://www.publish0x.com/?a=olejZqrzej

Splinterlands - https://splinterlands.com?ref=rnabc1

Upland - r.upland.me/NQAH

Binance - https://accounts.binance.com/en/register?ref=143611368

 

NFT Market Sales

Opensea - https://opensea.io/RNabc

 

Follow Me :)

Twitter - @RNabc123