Blockchain and Cryptocurrency Beginner - How Simple and Exponential Moving Averages Are Calculated and Uses in Trading
Calculating Simple Moving Average
The simple moving average basically calculates the average price of any cryptocurrency asset pair over a period of time period. The calculation is done by doing the addition of the closing prices of the selected cryptocurrency asset over a period of time, and diving the result by the number of the periods. For instance, if a 100 day simple moving average is chosen, the simple moving average will add the closing prices of the cryptocurrency asset of the 100 day and divide the result by 100.
Simple moving average = ( Sum of all prices on a N ) / N
N is the period of time
Calculating exponential moving average
Exponential moving average is calculated by doing the addition of the recent price actions to the previous exponential moving average. The formula for calculating exponential moving average is
Exponential moving average = (Exponential smoothing constant x (Current Price - Previous period exponential moving average)) + Previous period exponential moving average
The first period is calculated by using the simple moving average.
Two Ways to Use Them in Our Trading Operations
Both the simple moving average and exponential moving average is great for signaling a trend direction. When the simple average and the exponential moving average is moving up, it indicates that there is an upward price movement. If they are moving down, it indicates that there is a downward price movement.
Both are useful for determining entry and exit points. When the simple moving average or the exponential moving average is below the price, it is an entry signal and when the simple moving average or the exponential moving average is above the price, it is an exit signal.
Both the simple moving average and exponential moving average are great for determining support and resistance areas. When the simple moving average or the exponential moving average line is rising, it creates the support area, and when the simple moving average or exponential moving average is falling, it creates the resistance area.
