This indicator takes into account both old and new prices. However, it gives more attention to the recent changes and creates a smooth reliable trend with high accuracy.
Exponential Moving Average: How to Use EMA to Trade Volatile Crypto
10 May, 2023
On the one hand, the crypto world lures people with high profits. On the other hand, it is inseparable from the volatility concept. That means trends are changing and often abruptly leaving traders not only disappointed but also at a loss. No wonder traders and investors are constantly looking for some technical tools that can help to overcome this problem. One of them is the exponential moving average that has proven itself an efficient and useful part of the analysis. Let’s outline how to use the EMA indicator and benefit from its information.
Basics of exponential moving average formula
There is such a basic indicator as a simple moving average. It reveals the average price of some amount of candles. However, it has a big lag and sometimes leads to unpleasant mistakes. Thus, EMA was introduced as a tool that gives more weight to recent prices. It gives a quick response to the latest changes compared to the previous one. The main goal of this indicator is to smooth the price and remove insignificant fluctuations. The thing is the formula of this indicator closely follows the price. It utilizes previous values. However, the older data has less influence on the result than the newest. Namely, the calculation is done in the following way: EMA = EMA for the previous period + [Exponential smoothing constant × (Current price − EMA for the previous period)] Due to this idea, the lag in the price chart is reduced. The user observes the smoothed price and more reliable and accurate trend than in other cases. Sometimes, such a high sensitivity to prices confuses traders who think about how to trade using EMA. The best approach is to combine several tools and create your own set on which you can rely.
How to use EMA for trading?
The main goal of this tool is to help you to identify the current market trend. When an asset has an uptrend, its price rises higher than the EMA. In case of a bearish situation, the price remains below this indicator. A contraindication in it corresponds to a trend correction.
Thus, you can make a decision based on one of the following situations:* there is an uptrend when the price is stabilized above the indicator
- there is a downtrend when it is below it
- if there is some instability in price, it means correction
How to use EMA to day trade? One has to look for a stable price above the indicator to make a purchase. Furthermore, it is important to evaluate the trend’s strength. There are two main options for this: For short-term understanding, you need from 12 to 26 days. For medium- and long-term strategies use a time frame from 50 to 200 days. Which strategy to use? Here everything depends on your own trading plan and aims. Investors usually prefer long-term options as they give a better understanding of what awaits the market in the future. Day traders are, of course, more interested in short-term predictions. Still, there is always a good chance to combine these two techniques and benefit from the results. The main thing is to rely on more than one indicator and utilize their more informative combinations.
Searching for a trend
This strategy seeks to find the point at which it is suitable for owners to keep an asset at a current price. For this, traders usually combine EMA and SMA with high profitability. For instance, one can some SMA value for a long-term trend and an EMA for a short-term one. In this case, one should buy when the price exceeds both levels.
Using the EMA indicator as a dynamic tool
Some traders utilize static support or resistance level. However, the dynamic option that uses EMA is a good option for immediate reactions to the market situation. With its help, one can easily find out the closest reversal points according to the current trend.
At last, there is a chance to use a contradiction between two moving averages. Such strategies are called crossovers and one of the most favorite among them is the golden cross. If the 50 EMA is moving above the 200 SMA, it means that short-term traders are on the go, while the long-term trend is also bullish. Such a situation happens not very often but reveals a great chance to profit. In a nutshell, if you are looking for a reliable and accurate tool for your set, EMA is a good candidate for high-quality analysis. As far as we have seen above, it works well both on its own and in pairs with other indicators. Therefore, it provides lots of useful information and helps to navigate trends and profit from their changes and volatility.
Frequently Asked Questions
First of all, you have to select a short-term or long-term option for the calculation. They differ in a time frame. Then, look for an uptrend, downtrend or correction according to the position of the current price compared to the calculated EMA.
Yes, it has high accuracy and sensitivity. It makes the pricing smoother and gives a proper general idea of the market situation. Still, it is advisable to compare it with other tools.