Moving Average is generally an extremely important tool in technical analysis. They are the constituent of the famous indicators, two of which I have articles above are MACD and Bollinger Band.
In today's article, I will introduce an overview of two popular and widely used MA types: SMA and EMA.
Overview of moving average MA
Define:
MA is an indicator used to smooth the price of the price chart, simplifying the price action over time. Two commonly used and widely used MA types are the SMA and the EMA.
SMA is a Simple Moving Average.
The EMA is the Exponential Moving Average.
Meaning of SMA and EMA:
In terms of calculation formula:
SMA is the average of the previous n candlestick periods, where n is the calculation period. The most commonly used SMA is the 12, 36, 20, 50, 89, 100, and 200 SMA.
EMA is the exponential moving average of the previous n cycles of the candles, where n is the calculation period. To put it simply, if the SMA places equal emphasis on all candles in n cycles (adding up to n is done), the EMA places the focus on the candles closer to the current one (with greater weight. ). The most commonly used EMAs are 12, 36, 21, 50, 89, 200.
Applications of SMA
SMA is a simple, yet very effective indicator. Some applications of SMA are as follows:
Identify Trend
People often use the SMA200 to identify a long-term trend on the Daily frame.
Example 1:
Take a look at Chart daily BTC / USDT:
Analyzing the example:
On the left side of the chart, the price is below the SMA200, you can consider it as no bullish sign in the long term when the price line is below the MA200.
If the price is above the MA200, you can consider it as a bullish factor in the long term.
One downside of the SMA is that it shows lag signals. This is still true for indicators that use SMA in its composition such as MACD.
You pay attention that the price tended to increase from the previous hundred candles, but then cut to MA200. But also that is why the signals of the SMA give quite reliable.
To determine the long-term trend, you can use SMA200, while for the short-term trend, you can use SMA20 or the 10-20 SMA, SMA 12-36 pair. In general, there are many different ways to determine short-term trend with MAs.
Dynamic support and resistance
In addition to being used to identify long-term and short-term Trends, SMA is often used to identify trends, both short and medium term.
Example 2:
Please continue to observe the Chart daily BTC / USDT
Analyzing the example:
You can see that after the price struggled a few candles, the price broke out of the SMA200 with a large bearish candle. Before the price was above the SMA, we could see the SMA200 as a dynamic support for the price. When the price has broken decisively through the SMA, the SMA from the dynamic support line turns into a dynamic resistance line.
Then the price retests the SMA200 in the yellow areas by combining other tools you find trading signals in these sensitive places.
Swing Trade with SMA50 and SMA200
A long-term way to trade with the SMA lines is to take advantage of the intersection of the SMA50 and the SMA200.
For example:
Brothers observed Chart daily BTC / USDT
Image of MAs 3 What are MAs? How to use moving average lines in trading
Analyzing the example:
SMA50 crosses the SMA200, which is a sign that you should consider buying.
The SMA50 cuts down to the SMA200 is a sign you should consider selling.
To explain this, you can simply understand it like this: The average price trend of BTC in the medium term (SMA50 - 50 days) has surpassed the average price trend of BTC in the long term (SMA200 - 200). days) then this is a buy signal.
Note:
This way of trading you should use in the Daily frame because each candle in the Daily frame represents one day. Prices on smaller frames are very susceptible to manipulation by sharks and make this method no longer effective.
As you can see in the image above, if you trade on the SMA50 and SMA200 crossover signals, you can get close to 100% profit within a few months. If compared with markets like Vietnam stock market, this number is an extremely terrible number, you have to plow a lot, not just get in one transaction.
Application of the EMA
Basically what you can do with the SMA, you can also do with the EMA.
As I said at the beginning of the article, the EMA reacts faster than the SMA, so the EMA will be suitable for short-term time frames.
Identify Trends and dynamic support and resistance
Example 1:
Attention to the Chart daily of BTC / USDT
Image of MAs 4 What are MAs? How to use moving average lines in trading?
Notice on the chart, the black line is EMA12 and the orange line is the EMA36.
The zone created by the EMA12 and the EMA36 acts as the dynamic resistance support of the price in the Chart.
If the price is above that area, the price tends to increase, if the price is below that zone, it tends to decrease. Shrinking price range or EMA12 and EMA36 shrinking means a reversal is possible.
Image of MAs 5 What are MAs? How to use moving average lines in trading
In such narrow areas, you can combine other indicators to find trading signals.
As shown in the picture, after 2 strong bearish candles and contact with the area created by EMA12 and EMA36, the previous candle had no candlestick, showing that there was almost no buying force. On the next candle, the price has a beard that penetrated the dynamic support created by EMA12 and EMA36 and closed in it.
If you follow the Price Action, you can see this is a Setup Pin Bar going up at support. You can always enter a Buy Market order with the Stop Loss under the Pin Bar tree.
