Moving averages are very useful tools if you know how they work and how to utilize them efficiently. It is one of the most widely used trading indicators preferred by most traders because of their efficacy and because they offer excellent results. It is a tool that smoothens the price data providing a constant update about the price average in the trade.
Before the investor begins, he will have to decide whether he is going to use the EMA (exponential moving average) or SMA (simple moving average). EMA is speedier than the latter because it provides more weight to the changes of the price direction. However, this type of moving average is more vulnerable to sending wrong signals because of its fast reaction.
Once traders identify which of these two types of moving average they would like to use, they then need to determine the period setting that gives the best signals. Ask yourself if you will be a day trader or if you are looking for the best moment to go into or out of an investment. For day traders, they usually choose EMA due to its fast reaction to price changes, while investors often choose the SMA.
There are also different lengths (or periods) you can choose for moving averages. You should choose one depending on your purpose.
9 to 10 periods – extremely fast moving. This is suitable for swing traders and functions as a directional filter. It allows you to stay on the right side of the market while filtering out trades in the wrong directions.
21 periods – medium reaction with accurate moving average and is recommendable to ride trends
50 periods – moves slower but is suitable for determining the long-term directions and is mostly used by longer-term investors
Long-term investors also tend to look at the 100 and 200 days moving averages. These are good indicators for support and resistance and are useful to identify market trends (Bull/Bear market).
Take note that moving averages work when the cryptocurrency is trending. You should focus on the long positions when the 10 SMA is above the 30 EMA. On the other hand, you must focus on the short positions if you see that the 10 SMA is below the 30 EMA. You also need to remember that there must be plenty of space between the moving averages. Both of them must slope upward.
The lower the period of the moving average you choose, the more closely it can track the movements of the price. Different lengths of time allow the traders to analyze the flow of the market. Each investor has to find the moving average that is suitable to their timeframe and use this trading strategy for technical analysis in order to maximize results.