In technical indicators, the moving average is the most frequently used. Traders utilize it to determine the mood of the market. In financial trading, there is a greater likelihood that the price will keep moving toward a trend. To predict where the price may go, the moving average is essential. Technical analysis is now a crucial tool for traders in the cryptocurrency market because it makes it easier to predict price direction. Additionally, traders have quick access to various technical indicators, the moving average being the most important. This article will discuss the simple moving average (SMA) formula and how to use it to our advantage when analysing a cryptocurrency chart.
The average of a range of prices is determined by the number of periods that fall within the range using simple moving averages.
A simple moving average can help predict whether the price of an asset will rise or fall and whether a bullish or bearish trend will continue.
What is a moving average?
A moving average displays the average price of a given number of recent candles. Moving average is a potent indicator because it enables traders to identify trends without being overwhelmed by information. The basic idea is finding out what typical traders are doing in the market. For instance, if the price of a cryptocurrency asset is higher than its 50-day moving average, buyers are more active than sellers. So if you decide to trade that cryptocurrency, you can quickly rule out selling opportunities and only consider buying opportunities. Ideally, moving averages have a subset of an exponential moving average (EMA), weighted moving average (WMA), and simple moving average (SMA).
Understanding the formula of simple moving average (SMA)
A Simple moving averages (SMAs) are arithmetic moving averages computed by adding recent prices and dividing the result by the calculation average’s period count. For instance, one could add up a security’s closing prices over several periods, and then divide the total by the same number of periods. Short-term averages respond faster to changes in the price of the underlying token than long-term averages do.
Formula for simple moving average:
An= the price of a crypto asset at period n
n= the number of total periods
The true average price can be ascertained by investors using the simple moving average, which treats all prices equally. Every time a new candle opens, the SMA indicator also moves into a different position.
The closing prices for the first 10 days’ worth of data would be averaged out by a 10-day moving average. Similar to a rolling average, a 50-day moving average would gather enough data to average 50 consecutive days of data.
A simple moving average can be adjusted because it can be computed over various lengths of time. This is done by adding the security’s closing price for several periods and then dividing this total by the number of periods, which gives the average security price over the period.
By eliminating volatility, a simple moving average makes price trends easier to understand. If the simple moving average points up, the security’s price increases. If it is pointing down, the token’s price is decreasing.
Example of Simple Moving Average (SMA)
As seen in the illustration below, a price chart displays the moving average along with the price as a dynamic line that moves over time. In November 2022, when BTC/USD reached $20,900, the SMA line began to drift. The SMA line has been moving upward since the Bitcoin price started to correct in January 2023.
Exponential Moving Average Vs. Simple Moving Average
Here is the difference between the exponential and simple moving averages.
|Exponential Moving Average||Simple Moving Average|
|The EMA calculates using the value as of today and smoothing.||SMA uses the number of periods and the average price over those periods.|
|EMA gives recent data precedence.||SMA displays the average value over a given period of time.|
|Suitable for short-term trading and price reversals.||Appropriate for identifying long-term trends.|
|It is safer to use an EMA with a lower value.||SMA with higher values is dependable.|
The blockchain industry is expanding, and new use cases and applications are further advancing technical analysis. As a result of their high profitability, indicators like moving averages, oscillators, and volumes are likely to be used more actively in the future. However, a trader’s ability to predict price direction by combining various trading tools ultimately determines their success level.
Read more: Head And Shoulder Pattern: How To Identify It On A Crypto Chart?