The Exponential Moving Average or EMA, is one of the basic technical analysis indicators that is very useful for cryptocurrency traders to determine the trend of the value of an asset, taking into account the average value of the same during a certain period of time.

UOne of the most important instruments that can be used as a cryptocurrency trading strategy is the Exponential Moving Average (Exponential Moving Average) or EMA, for its acronym in English. The EMA is an strategy used to evaluate the trends in the markets. I mean, it allows us display the average price of an asset in the market, in a certain period.

How does the Exponential Moving Average (EMA) technical indicator work?

As its name indicates, it is a moving average that moves following price variations; that is, it collects the data generated in the last session, while discarding the oldest data in the time series. So the EMA responds more quickly to recent price variations than the Simple Moving Average (SMA). Although this also increases the probability of giving false or irrelevant signals, if the current trend of an asset is not clearly understood.

However, the EMA is one of the existing indicators in the world of technical analysis, which when used represents an excellent tool. Although we must also bear in mind that the EMA does not predict or anticipate any movement, but rather than following the price curve, serves to confirm a trend in a moment determined.

How is the EMA calculated?

To calculate an EMA, only a certain part of the current closing price must be added to the previous value of the SMA. Thus, to calculate an EMA of x periods, we will apply three simple steps:

  • Calculate SMA: This calculation is very simple. The value of the moving average is calculated by taking the closing prices of a given period. Then each of them is added, and the result of said sum is divided by the number of periods taken. That is, the sum of n periods, divided by n. Therefore, the operation would be as follows:

SMA = sum of the selected periods ÷ the number of selected periods

  • Calculate the multiplier to weight the EMA: This factor is determined by the number of EMA periods. So for its calculation, divide 2 by the number of periods taken plus 1. Therefore, the formula will be as follows:

Multiplier = [2 ÷ (number of selected periods + 1)] 

  • Finally, calculate the current EMA: Here the following formula will be applied:

Current EMA = [Close Price - EMA (previous day)] x multiplier + EMA (previous day)

The calculation of EMA favors the latest prices, since it gives them a higher weight. Which is significantly reduced as prices move away in time. For example, if we apply the formulas to calculate a 10-period EMA, the weight given to the price would be higher (18,18%). While for the calculation of an EMA of 20 periods, the weight would be lower (9,52%). So the weight will be higher for a shorter period EMA than for a longer period EMA.

How much do you know, cryptonuta?

Can the EMA indicator be useful for traders to take advantage of a trend?

TRUE!

Experienced traders can use EMA with a large amount of historical data that will help them improve the data thrown by the indicator, allowing the trader to make the best decision.

Usefulness of the EMA indicator

Entering the world of trading and technical analysis, many cryptocurrency traders employ moving average tools for multiple purposes, based on their stated goals. However, it is important to note that when making decisions to make an investment, EMAs are variable tools that must be used and combined with other instruments. In order to look for a greater probability of success in the operations carried out.

One of its most frequent uses is as an indicator in a breakout strategy. If we have a breakdown system with trend tracking with the Bollinger Bands and the EMA, we can use the bands to generate the trading signals. Since these will draw lines on the graph above and below the price. In the event that the price crosses the upper line, we will interpret it as a trading signal in that direction. Where the EMA, which acts as a trend indicator, must also coincide with the same direction.

Another very effective trading strategy is known as Exponential Moving Averages Crossing. That is to use the combination of two exponential moving averages, one for the short term and one for the long term. In this strategy, a signal is created when the shortest moving average crosses the longest moving average from the bottom up. This signal is called long position, and is taken as a buy signal in a bull market. Whereas if the longest moving average crosses the shortest moving average from top to bottom, it is called short position, and reflects a sell signal in a downtrend market.

However, as well as the previous examples, there are many other combinations that we can implement with this great tool. That not only helps us confirm a trend, but also helps us define when we can trade. Increasing our possibility of obtaining profits and reducing possible losses.