Moving above the Average with SMA — Technical Analysis

May 27, 2019

Trading Cryptocurrency with Technical Indicators

The cryptocurrency market is booming, and you have a handful of reasons to take advantage of its youth. We’re fortunate to have a few indicators that have proven themselves with crypto and that promise to bring traders a fresh source of income. You might be surprised at how basic arithmetic can bring you a perspective of the markets that you didn’t have before.

Trading above the average performance of the crowd is how you claim gains in the market over time, and how traders can eventually carve their own careers out. Let’s begin by smoothing things out with the “simple moving average.” Traders can watch price-moves with less emotion and insecurity once this indicator sets a trajectory.

If you’re unfamiliar with Technical Analysis we wrote an in-depth article about how Technical Analysis can Enhance Your Crypto Trading.

What Does an SMA Help to Do?

Determining the direction of price trends is how trades are made with the SMA. Prices change during every second of an active market, but these seconds aren’t enough to succeed on. Profit margins increase the longer traders can hold winning trades and the sooner they exit the losers. There are three variations to the SMA, and they are long, intermediate and short periods.

The moving average of long-term price trends identify the core trend of any currency. Intermediate trends are ideal for swing traders who get in and out of positions on a weekly to bi-weekly cycle. The short-term moving average provides a perspective on the current trends forming, but these are likely to be more short-lived than others.

In each case, the SMA will provide trajectory on the trends forming.

Simplicity All the Way

Arithmetic may sound complicated at first, but the SMA has a simple formula. Simplicity is what makes the SMA a popular indicator for traders around the world. Capturing the core values of any cryptocurrency creates a bird’s eye-view of what’s going. Traders can always trade with a naked chart, but they can also add just one or two SMAs to give that naked chart some structure.

Here are a few things to expect from this indicator:

- Easy to Calculate: The perspective that moving averages provide come from a simple equation that can be duplicated in all trading. Trading software can make these calculations in a hurry, but traders can also do the same. Having a moving average already in place won’t limit the data. It’s possible to find the SMA for all time-frames with a quick calculation.

- Periods of Closing Prices Divided by the Same: Starting with a candlestick chart is a reasonable way to understand how SMAs are calculated. Imagine that there is a day-chart on display, and the data shown presents the past 30-days, which would result in, at least, 30 separate candlesticks. You then take the closing price of each candle and add them up.

This gives you a total that is then divided by the total time-frame of the period being used. That would be 30-days in this case. The value you get could be plotted on your graph to provide you with the core range that prices are reaching and passing through.

- The Longer the Period, the Smoother the Data: It’s important to understand that the longer the time-frame used, the stronger the price data will be. Strength, in this case, is to say less sensitivity. Using a shorter time-frame to measure out an SMA would pick up current price movements more closely and be more likely to change consistently with those prices.

The further in the past you go, the more the SMA will hold to those past price points to create less sensitivity.

Why is a Moving Average Important?

Each major cryptocurrency is being traded by millions of people daily. This causes prices to change constantly. Getting a trajectory on those prices requires something in place to provide perspective with. We’d watch prices move without any rhyme or reason when without a “track” to visually follow. Tracking the movement of prices is why the moving average is key.

We’re going to cover how this can be used and how the structure of prices around an SMA can trigger the right opportunities to buy and sell.

How Can You Use the SMA?

A strategy is an essential ingredient to using the SMA. There are many tools and indicators to consider, but how they’re applied and the reasons for applying them sheds light on market conditions and can provide an edge over other traders. The crypto exchange is considered a zero-sum game, so the money that one trader loses is put into the hands of another who instead gains it.

Having just a little more insight and understanding of the market is the main factor between winning and losing. Traders use the SMA to give them an advantage and to peak how much information they gather about current price conditions.

- The Basic Strategy: Quieting down the market noise is what the primary role of the SMA is. It’s possible to have the SMA live and not actually use it to enter or exit positions, but having it present will create general price structures that provide relative positioning as current prices change. This indicator is also an average, which means that price fluctuations are smoothed out.

- Support/Resistance: Support and resistance are more commonly used through trend lines to indicate where prices have often stopped. Support areas within the SMA occur where prices aren’t able to fall below, and resistance occurs where prices reach a certain high but are unable to break-through it. Using the past price-points gives traders an accurate trajectory of where these levels are.

- Trigger Signals Above and Below with Crossovers: Triggers are the price actions that signal when it might be good to buy or sell. There are four common triggers to the SMA. Two of them deal with how live prices move above or below a charted SMA. The other common triggers happen when using more than one SMA. Market standards are for a 50 and 200-day SMA, whose sensitivity to each other will cause them to cross back and forth over and under each other.

The 200 SMA is considered the slow SMA while any average used with a smaller time-frame, like the 50-day average, is considered the fast SMA or the signal line. The slow SMA will remain steady in most cases, and this means that the fast SMA is what will cross over and move about. The fast SMA often signals an upward trend when it crosses or remains above the slow SMA.

When this fast average crosses under or remains below the slow SMA, there is often a down trend in formation.

Why Confirmation is the Key

Some traders have the benefit of a trading style that enables them to use the SMA for confirmation in their analyses. Information comes from many portals, and having something else in place to confirm the data you’re receiving ensures that you don’t jump into a trade prematurely. The same triggers we covered when prices move above or below the SMA or when two different SMAs crossover are the actions that can be used for confirmation.

It’s important to have confirmation because the markets are rarely foreseen to the exact detail. It helps to have something to validate your hunches and to prove your analysis correct. The SMA not only provides confirmation, but it allows traders to get a historical average for the live data they’re presented with. This enables greater accuracy, better strategies, and tangible data to make decisions with.

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