Chart Interpretation Series: Simple Moving Average SMA vs Exponential Moving Average EMA – Basics of Trend Trading

April 16th Chart Interpretation Series: Simple Moving Average SMA vs Exponential Moving Average EMA – Basics of Trend Trading

Read the Chart Interpretation Series:A guide designed for traders who imagine experts to understand and apply the most important chart indicators.

Understand whether you are a beginner just starting out with technical analysis or an experienced trader who wants to improve your knowledgeMoving AverageEverything can improve your trading decision level.

Let’s start with the basics:SMA vs EMA

What is the moving average?

Information about price lists can be confusing and complicated. Data fluctuations caused by price changes per second can even escape experienced traders.

Average movement helps to remove confusion and discover actual market trends.

Moving averages allow for easier identification of whether market trends are bullish, bearish, or consolidated, by averaging prices over a specific time frame.

The central role of moving averages:

• Check market trends
• Highlights potential entries and exit areas
• Check the signals of other indicators
• Avoid emotional transactions based on short-term volatility

On any trading platform, you will see two main types of moving averages.Simple Moving Average (SMA) andExponential Moving Average (EMA).

Let’s discuss together!

Simple Moving Average (SMA): Provides an observational perspective on long-term trends

On Bitfinex charts, it is a moving average (MA, moving average)

SMA is the closing price for a set period (for example, 10, 50, or 200 days) divided by the number of days in that period. SMA gives each price the same weight. It does not respond to short-term fluctuations in prices, but shows the average trend direction over a period of time.

example:A 50-day SMA adds up the closing prices for the past 50 days and splits them into 50.

Common Usage Scenarios:

• A quick traderEvaluate long-term market trends using 50 and 200-day SMAs frequently
• Trend FollowersObserve prices above or below SMA to predict trend reversal

advantage:

• Smooth
• Filter short-term disruptions in the market
• Strong long-term trend checks

Disadvantages:

• Unable to immediately reflect sudden price changes
• Early signals of rapid market change may be overlooked

Exponential Moving Average (EMA): More sensitive trend tracking indicators

The exponential moving average also calculates the average price.Prices give higher weight in the near futureand will become more sensitive to current price changes.

for example:The 20-day EMA still includes prices for the last 20 days, but today’s data has had a greater impact than it was two weeks ago.

EMA is popular among ultra-short-term traders and buyers because it can quickly reflect price changes.

Common Usage Scenarios:

• Short term tradersFrequently use EMA for 9, 12 or 20 days to grasp market trends quickly
• EMA is commonly usedCross Strategyshort-term EMA crosses long-term EMA, an entry or exit signal will be displayed

advantage:

• It more accurately reflects recent price trends
• Helps to detect early reversals of market trends
• More popular in the rapidly changing market

Disadvantages:

• More error signals may occur when the market fluctuates
• Overreactions can occur in a horizontal integrated market

Which technical analysis should I use for SMA vs. EMA?

It depends on youTrade Mode,Time range and investment goalsThere is no absolute standard answer depending on it.

Most experienced traders doUse at the same timeSMA and EMA. for example:

• Use SMA for 200 daysCheck the trend
• Use EMA for 20 daysFind the entry signal

Apply it to your Bitfinex chart and test it now!

1. Log in to Bitfinex
2. Select a chart (BTC/USD, etc.)
3. Click on the Technical Indicator to add it.

4. Observe the signal displayed by indicators when market trends or moving average crossing occurs

You will notice the following patterns:

• 20-day EMA is less than 50 days: Short-term prices are weaker than long-term trends
• MAs under 50 days: The market is still below the average long-term trend, so caution is needed
• Prices are slightly below the 20th EMA: the market is about to resume that trend, but it has not yet recovered completely

This simple exercise will improve your chart reading comprehension over any theory.

Moving averages and index averages are the basis for countless trading strategies. Whether you are using it as an independent trend filter, or using other technical indicators such as an exponentially smooth similarity moving average MACD or relative strength index RSI, mastering these indicators will help you make your trading decisions in a clearer and more gentle way.Chart Interpretation Series for the next issue:Use an exponential smooth moving average (MACD) to grab the turning points of trends and take the lead in figuring out the market pulse.