Being a trader can be very tasking and there’s always a need to keep yourself updated on the current trend. You need to keep on educating yourself and you may even try different strategies until you find the one that best suits you. Keeping track of your successful and unsuccessful trades is also a “must” so can either avoid or duplicate the action in your future trades. To make a wise trade, you will also need to use trading indicators for your technical analysis. One of these indicators includes the MAs or “moving averages”. MAs are tools used to determine the trend of the direction and summarize data points of a crypto asset over a set of periods with the total divided by the number of data points to create an average. In this article, we will discuss the different types of MAs for the benefit, especially for new investors who want to enter the crypto world as traders.
Basically, there are four types of MAs: Simple or Arithmetic, Exponential, Smoothed, and Weighted. What is the difference between these four types? Takes discuss them one by one.
Simple Moving Average (SMA)
This type of moving average refers to the “average price over a specified period” and is used to swiftly determine if a digital asset is going on an upward or downward trend. But since it is determined using past closing prices which means it is a lag indicator. It only shows the previous trend but not future prices. The most popular for long-term investors are the 50-day and 200-day SMA. While for short-term investors, they usually the 10-day and 20-day. How do you calculate for the SMA? You just need to sum up the closing price of the asset over a certain period of time and divide the value by the total number of days. You can compute for the 10-day SMA using the formula below.
SMA = (P1+P2+…..+Pn)
Pn = price of the asset at period n
n= the number of total periods
Traders usually use the SMA to determine the best time to buy or sell their digital assets. When prices surpass the SMA, it’s an indication of a bullish trend that signals “buying” time for traders. But when the prices fall below SMA, it means a downward is about to follow and it’s time for them to “sell”.
Exponential Moving Average (EMA)
This is similar to SMA which measures a trend direction over a period of time. However, SMA is a means of calculating an average of previous price data, Exponential Moving Average or EMA takes into account the current closing prices to the previous value of the moving average. Most crypto traders use the 8-day and 20-days EMAs whereas long-term traders use the 50-day and 200-day EMAs. Below is the formula and a step-by-step guide on how to calculate an EMA.
EMA = Closing price x multiplier + EMA (previous day) x (1-multiplier)
- To calculate the EMA, you need to get the SMA first for a specific period of time. (Refer to the formula above or simply follow this formula)
SMA = sum of the selected periods ÷ the number of selected periods
- Then, calculate the multiplier for weighting the EMA which is determined by the number of EMA periods. To calculate, divide 2 by the number of periods then add 1.
Multiplier = [2 ÷ (number of selected periods + 1)]
- Then, you can calculate the EMA using this formula.
Current EMA = [Close Price – EMA (previous day)] x multiplier + EMA (previous day)
Smoothed Moving Average (SMMA)
It is an Exponential Moving Average but with applied to a longer period. It is also similar to SMA which aims to reduce the noise and give a clear view of the market trend. It is also used to determine areas of support and resistance. Smoothed Moving Average or SMMA is most ideal for long-term traders since it has a much larger delayed reaction compared to EMA and SMA. Here’s the formula and the steps on how to compute for the SMMA.
SMMA (i) = (SMMA (i – 1) * (N – 1) + CLOSE (i)) / N
The first value of the SMMA is calculated as the SMA:
SUM1 = SUM (CLOSE (i), N)
SMMA1 = SUM1 / N
The second and other moving average is computed with this formula:
SMMA (i) = (SUM1 – SMMA1+CLOSE (i))/ N
SUM1 – is the total sum of closing prices for N periods
SMMA1 – is the smoothed moving average of the first bar
SMMA (i) – is the smoothed moving average of the current bar (except the first one)
CLOSE (i) – is the current closing price
N – is the smoothing period
Linear Weighted Moving Average (LWMA)
A moving average calculation that gives more weight to recent prices and is quicker to react to price change compared to SMA and EMA. The most recent price has the highest while the previous prices have progressively less weight. Linear Weighted Moving Average or LWMA is used to define the price trends and reversals, provide signals according to crossovers, and define areas of support and resistance. Below is the formula on how to calculate for an LWMA.
LWMA = SUM (CLOSE (i) * i, N) / SUM (i, N)
SUM – sum
CLOSE(i) – current close price
SUM (i, N) – the total sum of weight coefficients
N – smoothing period
If prices of cryptocurrencies are above the LWMA followed by a continued rise of the LWMA and the price is above the weighted average, this confirms an upward trend. But if prices are below the LWMA, and the LWMA is also going down, this confirms a downward trend.
That wraps up the different types of MAs or moving averages. In our next topic, we will cover the other indicators you can use together with MAs to perform an efficient technical analysis.