How To Trade Bitcoin & Other Cryptocurrencies With SMA
Technical analysis of the cryptocurrency market is vital for anyone that wants to trade Bitcoin or other tokens. One of the most useful tools in this regard is the SMA, or Simple Moving Average. This indicator has been used for many years by traders in stocks, FOREX, and commodities. It is now applied to the cryptocurrrency market, and most exchanges include it for the trader in a package of technical analysis tools. Here are a few things you need to know in order to familiarize yourself with the SMA of Bitcoin.
Getting Comfortable with Technical Analysis for Bitcoin
The popularity of Bitcoin has created many new traders with very little active trading experience. You might be in the category, and that means that you are probably new to the use of technical market analysis. Seeing all those lines and candlesticks can be overwhelming at first, but you should get comfortable with charts to improve your trading.
New traders presume that learning how to read charts is difficult. We would argue that most individuals can learn the basics of technical analysis in a short period of time. The interpretation of charts does not require any technical knowledge. It only requires that you learn how to spot specific patterns in the SMA and other charts. Don’t let yourself become intimidated by this important aspect of cryptocurrency market trading.
There is a learning curve. This we won’t dispute. But you can take measures to shorten that curve with dedicated study. It may be useful for you to obtain some historical charts. This can be easily accomplished with an Internet search, and you can probably find SMA examples that date back to the earliest days of Bitcoin. Assemble these charts and look at the corresponding market prices. Soon you will be able to see the important patterns in the graphs.
The SMA and other tools like Bollinger Bands rely on complex mathematics that are generally very accurate. The great thing is that you don’t need to be a mathematician or statistician to use the tools. Let the charts do the work for you, and focus on interpretation of the data. The serious trader may want to devote a portion of each day to chart analysis in order to sharpen their skills.
Please know that the failure to use some type of technical analysis will probably result in trading losses. Without the tools your trading is really nothing more than gambling. It is virtually impossible to outguess the Bitcoin market. It is a very volatile security that can manifest extreme prices changes in a single day. You should also know that cryptocurrency trading carries an inherent risk of loss. Proceed with caution.
What is an SMA?
A moving average is a tool that helps traders spot price trends over the short, medium, and long term. There are three popular types of moving averages used by traders. The Simple Moving Average is the most frequently used. Other types include the Exponential Moving Average and the Linear Weighted Moving Average. All of them are usually denoted by their initials.
It would be fair to say that the SMA lives up to its name – simple. It is easier to work with than the other forms of moving averages, and maybe that is why traders like to use it. What an SMA primarily does is remove the static that investors can encounter in the market on a day to day basis to reveal the underlying important trend. On any given trading day the price of Bitcoin can present massive fluctuations. This can obscure the overall dominant trend. By combining data from the past ten days, or another parameter that is specified by the investor, the SMA levels out the daily fluctuations to offer a more generalized picture of a trend.
To create its data, the SMA takes the sum of all past closing Bitcoin prices over a specified time period. The investor can choose a ten-day, fifty-day, or even a 200-day period. It then divides that sum by the total number of prices that were used to compile the data. A 200-day SMA would take the last two hundred closing prices, total them, and divide by 200 to produce the SMA.
You’re probably thinking that this sounds like a lot of work for the trader. As with all technical analysis tools, the work is done for you. Your chart will be automatically created and all you need to do is interpret the results.
The SMA does have its share of critics. Some argue that it is weighted too heavily by very short-term price changes. This is an especially valid concern regarding Bitcoin. A price change on any given day has the same impact as the price on another day, so what happened 199 days ago will affect the data as much as what happened yesterday. Still, traders should note that longer periods tend to produce more accurate results.
How the SMA Works in Trading Bitcoin
Traders who use the SMA want to attempt a projection of where the price of Bitcoin could be headed. Imagine if you could anticipate a sell-off or price decline. This would allow you to liquidate your holdings for a profit, or it would allow you to short the token if you are a margin trader. That kind of information could possibly increase the chance of winning trades.
Let’s begin by taking a look at a sample SMA chart:
In this chart you can see lines which represent the moving average for 50 days, 100 days, and 200 days. What traders are looking for is when the moving averages cross. This can be a trading signal that the value of the security is about to move downwards or upwards depending upon the direction of the cross.
The chart pictured is from March of 2018. This was the period following the huge Bitcoin bull market of late 2017. As you can see in the pic, investors were concerned about the presence of a so-called “death cross” in the Bitcoin SMA. This happens when the 50-day SMA crosses the 200-day SMA. To some extent, the pattern has held throughout 2018 with Bitcoin taking a strong hit to its value without significant recovery.
In short, crosses of the SMA can be useful indicators of where the market is headed long-term. Smart investors ride the trend until the end, and the SMA can often illuminate when a long-term change to the trend is coming.
The Best Way to Approach SMA with Bitcoin
A smart trader should never rely on one simple technical analysis tool. It is always best to confirm or verify trading signals with multiple tools. The SMA is not quite complex enough to be a solid market indicator on its own, so you might also want to consider the use of:
- Relative Strength Index or RSI
- Stochastic charts
- MACD indicator
- Support and resistance
- Bollinger Bands
The maintenance of accurate charts is a must for any serious investor. Most traders today prefer to keep their charts on a computer. It can make them much easier to view on a daily basis.
Where to find SMA charts for Bitcoin
Traders can find many third-party resources that sell charts for a fee. The fees for charting packages can often be expensive, and this type of service may only be suitable for the very active trader that is moving a lot of Bitcoin on a daily basis.
Your best option will probably be accessing charts for free through your chosen Bitcoin exchange. Cryptoswede has reviewed many such exchanges and recommended the ones with the best overall reputation. These exchanges generally provide a large number of technical analysis tools to active traders. Use them wisely.
We would recommend that you only begin with a couple of tools. Wait until you have mastered using these before you add others. Adding too many indicators to your charts will render the chart unreadable and make matters confusing.