How to leverage it in the crypto market?

Various indicators are available for cryptocurrency to help traders hone their skills, but one that stands out in particular is EMA, or exponential moving average.

Technically, an asset, stock or cryptocurrency’s exponential moving average (EMA) highlights recent price changes and data points while maintaining older chart observations. While an SMA only calculates the average of an asset’s closing prices over a specified period, an EMA also takes into account the most recent price movements. For example, to determine an asset’s SMA for the previous 20 days, we will divide the closing prices by 20. Calculating the exponential moving average of the same asset requires a few extra steps. Let’s examine the exponential moving average formula and how to use it to our advantage when trading cryptocurrencies.

Key takeaways

The EMA is a moving average that increases the importance and weight of the most recent data points.

Like all moving averages, this technical indicator produces buy and sell signals based on crossings and deviations from the historical average.

A few examples of the different EMA lengths that traders often use are the 10-day, 50-day and 200-day moving averages.

What is an EMA (exponential moving average)?

The moving average (MA) type, known as the exponential moving average (EMA) gives more weight to recent price information. As a result, traders looking for recent price changes of an asset prefer it.

The exponential moving average (EMA) reacts quickly to changes in asset prices in the financial market, unlike other moving averages. Traders who want to monitor and react to the most recent changes in the price of a particular asset, stock or cryptocurrency draw an EMA line using the indicator.

An uptrend, or to put it simply, a bullish signal, is represented when the candles are above the EMA lines. Look at the chart above and notice how the yellow line reacts to sudden price changes. From the left, notice how a bullish pattern developed after two candles formed above the yellow EMA line. As long as the price of this asset did not fall below the point at which the purple EMA line was crossed, it remained bullish. However, a large candle fell below the purple line near the chart’s end, and the market continued to fall. Due to its ability to predict future prices by examining past price trends of an asset in the financial markets, EMA is highly regarded by traders.

Read more: Pennant Pattern: How to Identify Pennants on a Crypto Chart?

Exponential moving average formula

The mathematical formula for the exponential moving average is –

Here, EMA is the exponential moving average.

What does the exponential moving average calculation indicate?

The most frequently cited and studied short-term averages are the 12- and 26-day exponential moving averages (EMAs). Indicators such as the moving average convergence divergence (MACD) and the percentage price oscillator (PPO) are made using the 12- and 26-day. Generally, long-term trend indicators are used with the 50- and 200-day EMAs. It is a technical indicator of a reversal when a stock price crosses its 200-day moving average.

An EMA does help to reduce the adverse effects of delays. The EMA calculation “hugs” the price action a little more closely and reacts more quickly because it gives more weight to the most recent data.

EMAs work much better in trending markets than all other moving average indicators. The EMA indicator line will show an uptrend when the market is strong and long lasting and a downtrend when it is the opposite. An alert trader will focus on the direction of the EMA line and the relationship between the rate of change from one bar to the next. For example, a strong uptrend’s price action begins to flatten and reverse. It may be time to change to a more bullish investment from an opportunity cost standpoint.

Examples of using the exponential moving average

EMAs in conjunction with other indicators validate important market movements and assess their veracity. The EMA is more useful for traders who trade within one day and in volatile markets. Traders frequently use EMAs to establish a trading bias. A trader trading intraday may only do so on the long side if an EMA on a daily chart shows a solid uptrend.

Here is a perfect illustration of EMA on the Ethereum chart. A bullish reversal pattern called “three inside up” is formed by the price of Ethereum on the daily chart. If the buying pressure remains constant, the price will eventually reach the 50-day EMA (Exponential Moving Average), which is located at $2,820.

Conclusion Moving averages are extremely useful and informative for traders who use technical analysis properly. However, they know that if these signals are misused or misinterpreted, they can wreak havoc. Technical analysis frequently uses moving averages, which are all lagging indicators.

Consequently, conclusions drawn from the use of a moving average on a particular market chart should either confirm a market move or show how strong it is. The best time to enter the market has typically passed before a moving average signals a trend change.

Read more: Head and Shoulders Pattern: How to Identify It on a Crypto Chart?