Welcome to Chart Decoder Series: Bitfinex’s dedicated series designed to help you understand and apply the most essential chart indicators like a pro.
Whether you’re just getting started with technical analysis or you’re a seasoned trader refining your edge, understanding moving averages is a fundamental skill that can level up your trading decisions.
Let’s start with the basics: SMA vs EMA.
Price charts can be messy and complicated. Every second, prices tick up and down, creating a whirlwind of data that can overwhelm even experienced traders.
Moving averages help you step back from the chaos and spot the real trend.
They smooth out price data over a specific time period, making it easier to identify whether the market is trending upward, downward, or simply consolidating.
At their core, moving averages are used to:
There are two main types of moving averages you’ll see on any trading platform: the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
Let’s break them down.
On Bitfinex, this appears as: Moving Average (MA)
The SMA takes the closing prices over a set number of periods (e.g. 10, 50, or 200), adds them together, and divides by that number. Every price has equal weight. The SMA doesn’t react to every wiggle, just shows you the average direction over time.
Example: A 50-day SMA adds up the past 50 closing prices and divides by 50.
Common Use Cases:
Pros:
Cons:
The Exponential Moving Average also calculates an average price, but it gives more weight to recent prices, making it more sensitive to current market movements.
Example: A 20-day EMA still includes the last 20 days of prices, but today’s data influences it more than data from two weeks ago.
EMAs are favored by day traders and scalpers who need to respond quickly to momentum shifts.
Common Use Cases:
Pros:
Cons:
There’s no one-size-fits-all answer. The best choice depends on your trading style, time horizon, and goals.
Most experienced traders use both. For example:
Want to put this into action right now?
You’ll start to notice patterns:
This simple practice will sharpen your chart-reading skills more than any theory ever could.
SMA and EMA are the foundation of countless trading strategies. Whether you’re using them as a standalone trend filter or combining them with other tools like MACD or RSI, mastering these indicators gives you a clearer, calmer way to trade.
Coming up next in our series to Master your Charts: How to use MACD to spot momentum shifts before the crowd.
The post <strong>Chart Decoder Series: SMA vs EMA – The Foundation of Trend Trading</strong> appeared first on Bitfinex blog.