Trade Bitcoin & Other Cryptocurrencies Using An Ema
There is simply no substitute for technical analysis of the cryptocurrency market if one wants to trade Bitcoin, Ethereum, or other digital tokens. There are many trading tools available for the investor, but one of the most accurate is the EMA, or Exponential Moving Average. The EMA has been used for many years by those who trade stocks, commodities, and FOREX. Now it is being applied to trading Bitcoin by many shrewd investors. You can access the Bitcoin EMA for free at many cryptocurrency exchanges. Here is a brief guide that will help you understand how to use this technical analysis tool.
Learning to Employ the EMA and Technical Analysis in Bitcoin Trading
Bitcoin is an exciting asset that has encouraged many newcomers to begin trading. Many of these people have little or no prior trading experience. It is great to see the markets open up this way, but many new traders lose money because they are unfamiliar with the EMA and other tools. Indeed, at first glance an EMA chart can be intimidating. Still, you should work to familiarize yourself with how to use technical indicators.
There is a general assumption that learning how to read charts is very difficult. All those lines and candlesticks look like a foreign language. But, just as one initially learns to master a foreign language by visually recognizing common words and phrases, all the trader needs to learn how to do is spot patterns in the charts. Knowing what those patters might mean does not require a high level of technical knowledge. Anyone of average intelligence can learn to decipher Bitcoin trading charts. The key is to approach the exercise with confidence.
No one will dispute that this activity involves a learning curve. So it is with life. You did not learn to walk in a single day. You had to crawl first. The more that you work with these indicators the more comfortable that you will become. The best way to proceed quickly in your knowledge of EMAs is to obtain some old historical charts and study. You can find some with an Internet search, and some of these will probably date back to the earliest days of Bitcoin. You will want to put together a collection of these charts and then make an accompanying set of historical price data. When you compare the two you will notice that certain patterns in the charts begin to repeat.
The EMA and its relative the SMA, or Simple Moving Average, both rely on precise mathematical formulas to predict changes in the Bitcoin market. These formulas can be very accurate. You don’t need a background in mathematics to be able to understand the charts. Your job is to let the charts provide the data while you interpret the information that is given. Cryptoswede recommends setting aside time each week for study of your charts.
We must stress that the failure to use some type of technical analysis in your trading is probably going to lead to losses in the cryptocurrency market. You might as well be tossing darts at a board without the use of tools. No one can accurately predict the movement of such a volatile market by chance. Bitcoin is a volatile security that can have extreme price swings within a single day. Also remember that trading Bitcoin and other tokens carries an inherent risk of loss. You should only use funds that have been allocated to making cryptocurrency trades.
What is an EMA?
A moving average is a technical indicator that can reveal the price trends of Bitcoin over a specified time period. Moving averages can be broken down into three distinct types:
- The Simple Moving Average
- The Exponential Moving Average
- The Linear Weighted Moving Average
Each of these charts is usually referred to by its initials. So, we say EMA instead of Exponential Moving Average. To understand what an EMA is we first need to understand the SMA. Both of them work on the same basic principle.
Moving averages help to eliminate static in the market so that a clear picture can be observed. Think about tuning the radio in your car and trying to find a broadcast station. You will spin the dial along the FM spectrum, passing through static until a clear sound emerges. This is basically the same way that a moving average works. It turns the dial for you until all you are left with is clarity. The reason the SMA is called a simple moving average is because it is easier and more basic to work with than other moving averages.
On any given trading day the price of Bitcoin can fluctuate. A moving average combines data from a select range of days to provide a picture of the dominant trend during the specified period. For the SMA, this means taking the sum of all past closing Bitcoin prices over a specific time period and dividing that sum by the total number of prices considered. In a 50-day SMA you would add all the closing prices for the past 50 days and divide the total by 50 to get the SMA. That sounds like a lot of work, but remember that the moving average tool does this computation for you and produces the graph. You just need to interpret.
While the SMA gives you a picture of Bitcoin price trends, some traders feel like it is not accurate enough as a tool. These traders prefer the EMA. The EMA can be more accurate because it assigns more importance to the most recent prices in the time period selected. In other words, when you choose the 50-day EMA the price closings toward the end of the period will be given greater weight in the computation of the graph. This can be very useful in predicting if a trend is about to change. In the SMA, whatever happened with the price 49 days ago will have the same impact as what happened yesterday.
The EMA takes advantage of a basic principle of technical analysis. The longer the period considered and the more precise the data, the better the indicator will be.
Using an EMA to Trade Bitcoin
Those who use an EMA to trade Bitcoin and other cryptocurrencies are trying to project where the price of the security is headed. They are using the tool to speculate about market trends. Now, as the fictional Wall Street insider Gordon Gekko said, “The mother of all evil is speculation.” But speculation is what drives trading. You have to make an educated projection about where the market is headed.
Think about how wonderful it would be if you could predict when the market was going to turn up or down. Imagine how much profit you could make if you were able to anticipate a sell-off before it happened. You could then short the cryptocurrency for a nice gain if you were trading on a margin. If you were simply buying to hold you would know that it might be better to wait for a better entry point before you committed to a buy. Either way, information is power. And power in the cryptocurrency market can make you a lot of money.
Let’s begin by taking a look at a sample EMA chart. This chart provides a 50-day EMA from the period of September 13, 2018 to November 10, 2018 and was provided by Bitstamp:
As you look at this chart you will see there is a candlestick graph which depicts the price of Bitcoin each day. You can read more about candlestick charts here on Cryptoswede. What you want to look at in the above chart is the slope of the EMA line that has been placed over the candlesticks. The line is an indicator of the overall trend of the token. We can see that over the past 50 days Bitcoin has been in a decline overall.
What those who use the EMA look for is a point when the closing price crosses the EMA. Notice that October 8, 2018 was the last time Bitcoin crossed over the EMA, although it closed below. On November 8, 2018 we see that the price closed above the EMA for the first time in many days. This could mean that a short-term reversal of the trend is coming. We say short-term because the chart we used is only a 50-day chart.
Let’s take a look at the same EMA chart for a period of 200 days:
The 200-day EMA chart provides a much stronger confirmation that Bitcoin is in a prolonged downward trend. There is little here to indicate that the price will change its trend anytime soon. Based on contrasting the two EMA charts we could conclude that a brief increase in the price of Bitcoin is possible, but overall it appears that the token will continue to trend downward for the future.
The Best Way to Approach EMA with Bitcoin
Here is where Bitcoin technical analysis gets tricky. If we use only this tool as a predictor of the market, we are likely to be disappointed. Why? Because even technical tools like the EMA are offering a guess of where the market is headed. To use them effectively we must learn to support their conclusions with the use of other tools.
Other Bitcoin trading tools that you can use are:
- Bollinger Bands
- Support and Resistance
The projections of a tool become more valuable when they are corroborated by the projections of another tool or several of them. Never base your trades on one single indicator.
Where to Find EMA Charts for Bitcoin
Some traders will pay lots of money for a sophisticated trading package. This might be feasible for the trader that trades at high volumes, but it will probably be out of range for the casual investor. We recommend that you find free access to trading charts as you begin your trading journey.
A good resource is BitcoinCharts. You can get just about any type of charts that you want for free at this website. You will also find that your preferred cryptocurrency exchange will probably provide you with Bitcoin price charts for free when you create an account. All you need to do is open up your trading platform, choose which charts you want, and add them to your candlestick chart.
Remember, too much of a good thing is not a good thing. When you add too many charts to your platform the result can be an indecipherable mess. Learn to master two or three good tools before you add more to your charting package.