What are Exponential Moving Averages (EMAs) in crypto trading?

Despite having the potential to be quite rewarding, crypto trading is considered risky due to its volatile nature. Since traders' money is on the line, they cannot simply try and guess which way the price might go next. Instead, they rely on robust technical indicators and signals. One of the most commonly used indicators is the Moving Average (MA). A Moving Average can be Simple or Exponential.

This guide will focus on the Exponential Moving Average (EMA). It will explain what it is, what it tells you, and how to use it.

What is a Moving Average (MA)?

As far as technical indicators are concerned, Moving Averages are one of the most popular ones.

A Moving average is a statistical calculation commonly used to analyze the price of an asset. Of course, moving averages are not crypto-exclusive and are used for technical analysis in other markets. Traders use it to identify trends and calculate support and resistance levels.

Moving averages cover different time periods, depending on the trader's needs and interests. One of the most commonly used periods include 50 days and 200 days. So, for example, a moving average that shows the last 50 days is called the 50-day MA.

Meanwhile, there is a different type of moving average called the Exponential Moving Average.

What is an Exponential Moving Average (EMA)?

The Exponential Moving Average, or EMA, is a technical indicator traders use. It provides a greater weighting to recent prices in its calculation.

EMA's are an excellent tool for exponentially smoothing prices and removing short-term fluctuations. Due to high price volatility, these fluctuations are constantly in the crypto industry. By smoothing them over, traders can better view the current trend, making EMAs an excellent tool for identifying trends.

The equation for calculating EMA is more complicated than that for calculating SMA: The reason is that EMA assigns more value to the recent inputs. EMAs are also more likely to project price reversals faster, so they tend to be favored, despite being more complex. They are especially useful in short-term trading.

How do you calculate EMAs?

Calculating the Exponential Moving Average requires one additional observation than the SMA. Assuming you wish to use 20 days as the number of observations, you can only calculate the SMA on the 21st day. The calculation for SMA is also reasonably straightforward. All you need is the closing prices of the asset divided by the number of observations for a period. So, for a 20-day SMA, divide the sum of closing prices by 20.

To get the EMA, you must first calculate the SMA, as described above. After that, you must calculate the multiplier for smoothing (weighting). This factor is determined by the number of periods of the EMA. This uses a typical formula: divide two by the number of observations and add 1. For a 20-day moving average, that multiplier would look like this: [2/(20+1)]= 0.0952. The final step is to use one more formula, and you will have your EMA: EMA = Closing price x multiplier + EMA (previous day) x (1-multiplier).

What do EMAs tell you?

Ema

Short-term EMAs are a great addition to any trader's technical analysis arsenal. It's important to remember that misusing these signals is relatively easy. When misinterpreted, traders put their portfolios at risk.

Thanks to its exponential smoothing, EMAs can afford to alleviate the negative impact of time lags. Like most other MA indicators, EMAs are better suited for trending markets.

Why are Exponential Moving Averages used?

EMAs are used because they are among the top technical indicators while trading, as they have a solid reputation for predicting the market's direction. Exponential Moving Average's can help crypto users detect trading bias, which is also very useful. While it is difficult to calculate, traders can use it efficiently once they get a bit of practice.

Advantages and limitations of the Exponential Moving Average

The Exponential Moving Averages are an excellent tool for using price volatility to your advantage. However, it has advantages and limitations like any other indicator and tool.

EMA pros:

  • EMAs can reveal more accurate results than SMAs. This is due to its ability to focus on the latest price changes.
  • Apart from trend identification, EMAs act as dynamic support and resistance levels.
  • EMAs are easily combined with other indicators, including RSI, MACD, ADX, and more.
  • EMAs are reactive indicators and an excellent tool for defining market movement.
  • Investors can even use EMAs to identify potential trend reversal points. This can be done by measuring the gap between the price and the EMA. As the gap increases, so does the possibility of reversal.
  • EMAs also supplement traders' investment strategies. For instance, EMAs are frequently used to identify golden crosses, which occur when short-term EMAs cross long-term EMAs.

EMA cons:

  • EMAs lag less than SMAs but still experience some lag.
  • EMAs could provide false signals if the market is particularly volatile.
  • EMAs are only part of a trading strategy and technical analysis and cannot act as a sole signal.
  • It's common for the crypto market to experience sharp bullish movements. However, such movements can be missed by EMAs. As a result, traders might miss some opportunities if they rely primarily on it.

Should you use EMA in crypto trading?

The Exponential Moving Average is one of the most popular tools in crypto trading. You can use it as a reactive indicator for trend identification and spotting support and resistance levels. EMAs are also used to identify golden crosses and death crosses.

However, despite all these and other benefits, EMAs still have some issues. For example, they need to be more reliable to be used as a sole technical indicator. Still, that doesn't mean that it should be ignored. The EMA's benefits outweigh its flaws quite heavily. All that a trader needs to ensure is that they are using it properly. Improper use can be highly misleading and throw your entire strategy off. As always, educating yourself on its proper use and combining it with other indicators is essential.


FAQs

What is a good EMA?

A "good" EMA depends on the strategy, time frame, and market you are analyzing. Different traders may have other preferences and requirements. It is not easy to define a good EMA, as this definition changes depending on the trader and their situation.

What is EMA 20 in crypto?

The EMA 20 refers to a 20-day Exponential Moving Average. It represents the average price of a cryptocurrency over a 20-day period. In doing so, it gives more weight to recent price data.

What is 50 EMA in crypto?

The 50 EMA in crypto is the same as the 20-day EMA; only it covers a longer period — the last 50 days. Given the lengthier period, it assesses medium-term trends and market dynamics.

What is a golden cross?

It is considered a bullish signal when the 20 EMA crosses above the 50 EMA. This event is commonly referred to as a golden cross.

What is a death cross in trading?

A death cross is the opposite of the golden cross. It refers to a bearish technical pattern that occurs when a short-term MA crosses below a longer-term MA. This commonly-used pattern warns traders that the bearish period is coming.

How are EMAs used in momentum trading?

EMAs are often used in momentum trading, as they can help traders identify trend reversals. Apart from that, traders can also use it to capture short-term price movements. There are many use cases for EMA in momentum trading, implying that it can significantly benefit the trader.

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