When it comes to technical analysis of any cryptocurrency asset over a period of time, moving averages are very beneficial when it comes to analyzing price actions over a fixed period of time. Like the name, a moving average basically represents the average closing price of any selected cryptocurrency asset over a fixed period of time. As far as moving average is concerned, there are two common moving averages used by many traders and technical analysts when it comes to technical analysis of any cryptocurrency asset; the simple moving average known in short as SMA and the exponential moving average known in short as EMA. Both the SMA and the EMA are commonly used by a lot of traders, however, each moving average has its own area of strength hence why a certain type of traders make use of one or the other depending on the trading situation. While both the simple moving average and the exponential moving average are both moving average indicators, they are slightly different in the way they work.
Simple moving average
A simple moving average is basically a type of moving average technical indicator that calculates the average price of any cryptocurrency asset pair over a period of time period. The simple moving average indicator has shown to be a really effective indicator for determining trend direction. The way this works is that if the simple moving average is moving up, it indicates that there is an upward price movement. If the simple moving average is moving down, it indicates that there is a downward price movement.
When it comes to the simple moving average, the most common period is the 200 periods simple average for calculating the long term average price of any cryptocurrency asset. This is great for determining long term trends. A simple average indicator creates a smoother line when averaging long term prices over a period of time. The simple moving average is also a great indicator for signalling entry and exit points. The way this works is that when the simple average is below the price, it is an entry signal and when the simple moving average is above the price, it is an exit signal.
Exponential moving average
An exponential moving average is basically a type of moving average technical indicator that is very similar to the simple moving average but with its own differences. An exponential moving average is simply a moving that gives more weight to the current price based on a particular time period. The exponential moving average indicator is more sensitive to current price movement and has shown to be a really effective way for determining trend direction early and is great for the short term.
When it comes to the exponential moving average, short term time periods are most common. The exponential moving average is a great indicator for signalling entry and exit points as well. when the exponential moving average is moving up, it is an entry signal and when the simple moving average moves down, it is an exit signal. Also, the exponential moving average is great for determining support and resistance areas. The way this works is that, when the exponential moving average line is rising, it creates the support area, and when the exponential moving average is falling, it creates the resistance area.