Death Cross in cryptocurrency trading explained. What is a SMA (simple moving average), EMA? What does a death cross indicate for the price of a cryptocurrency?
What is a Death Cross in Cryptocurrency Trading?
The “death cross” is a market chart pattern reflecting recent price weakness. It refers to the drop of a short-term moving average—meaning the average of recent closing prices for a stock, stock index, commodity or cryptocurrency over a set period of time—below a longer-term moving average. The most closely watched stock-market moving averages are the 50-day and the 200-day SMA.
In the above picture you can see the death cross when the 250 day SMA crosses from above the 200 day SMA.
What is a SMA (Simple Moving Average)?
A Simple Moving Average (SMA) is a widely used technical analysis tool that helps traders and investors identify the direction of an asset’s price trend by smoothing out short-term price fluctuations. It is calculated by taking the average of a set of price data points over a specified number of periods. The resulting line represents the asset’s average price over the given time frame, making it easier to identify patterns and trends in the data.
SMA is considered a “lagging” indicator because it uses past data to create the average, which means it can only provide insight into past trends and may not be effective in predicting future price movements. Despite this limitation, SMA remains a popular tool among traders and investors because of its simplicity and the ease with which it can be applied to a variety of assets.
The formula for calculating SMA is straightforward:
SMA = (Sum of the past "n" period's closing prices) / "n"where “n” represents the number of periods being considered. For example, if a trader wants to calculate the 20-day SMA of a stock, they would sum the stock’s closing price for the past 20 days and divide the result by 20. The resulting value would be the average closing price for the stock over the past 20 days.
In conclusion, Simple Moving Average is a useful tool for traders and investors to identify trends and make informed decisions. However, it is important to keep in mind its limitations and to use it in conjunction with other technical indicators to gain a comprehensive understanding of market conditions.
What is an exponential moving average (EMA)?
An Exponential Moving Average (EMA) is a type of technical analysis tool used to identify the direction of an asset’s price trend by smoothing out short-term price fluctuations. Unlike the Simple Moving Average (SMA), the EMA gives more weight to recent price data, making it a more responsive indicator of recent price movements.
The formula for calculating the EMA is as follows:
EMA = (Closing Price - Previous EMA) x (2 / (Time Periods + 1)) + Previous EMAwhere “Closing Price” is the most recent price of the asset being analyzed, “Previous EMA” is the previous period’s EMA value, and “Time Periods” is the number of periods being considered (e.g. 10 days, 20 days, 50 days, etc.). The result of this formula is a line that represents the asset’s average price over the given time frame.
The EMA is considered a “lagging” indicator, meaning it uses past data to generate the average, and as such it can only provide insight into past trends and may not be effective in predicting future price movements. However, because it gives more weight to recent price data, it can be a more responsive indicator of recent price movements than the SMA.
In conclusion, the Exponential Moving Average is a popular technical analysis tool among traders and investors because of its ability to quickly respond to recent price movements. It can be used to identify trends and make informed trading decisions, but it is important to keep in mind its limitations and to use it in conjunction with other technical indicators for a comprehensive understanding of market conditions.
Conclusion
There are a lot of more chart patterns you can make with moving averages the death cross is one of the most widley known and used pattern. It can indicate a weaking of the price and hence the start of a long-term lasting downtrend of the cryptocurrency. Crypticorn’s AI uses a variety of moving averages as input for the crypto price predictions.
