When trading, one of the biggest question me and you will ever want to answer is knowing when to sell or when to buy. Just never forget, buy cheap and sell expensive; but the real question is when. If a pair is having a bullying trend, should I sell right away or wait because I may lose some potential earnings; on the other hand, if the pair is having a bearing trend, should I buy right away, or should I wait a little longer? Let's say trading is the art of predicting the future by knowing the past.
Thank god, trading experts have given us metrics and one of them is EMA. I will show you some very basic use of EMA to help you decide when to buy or sell.
The Exponential Moving Average allows you to know an average price giving emphasis to the most recent data. EMA is defined in a recursive way:
EMA(n) = (P * α) + EMA(n-1) * (1 - α)
α = 2 / (1 + n)
- n > 0, it's the data elements, in inverse order from now that will be considered for the calculation. if n = 2, then data considered will be t0 (now) and t-1
- P is the current pair price
My Simple Technique
The technique I am going to explain is very simple. It is very probable that someone has already known it and it has a name, but I figured it out by myself. The technique consists of comparing EMA's values. It will allow you to know when it is a good time to sell or buy. This does not mean you must do a trade, but it is a point of time that needs to be evaluated to see if the selling or buying price makes a good profit or not.
In short, this technique is EMA(2) vs EMA(4). The following graphic tries to illustrate it in a visual way.
The yellow line represents EMA(2) the purple one EMA(4). When EMA(2) ≈ EMA(4), it represents a change of trend and it is a moment to make an evaluation for a profit or not. You will need to round numbers, I recommend to use the minimal trade quantity allowed for your Exchange. For example, in Poloniex it is 0.0001, therefore if EMA(2) = 1.23456 and EMA(4) = 1.234567, the equal condition would be true.
This technique can be used with any scale, personally speaking, I use 15 minutes candles.
Look how the correct use of this technique shows you when it is a good time to buy; it was when the price was 3.93. It also prevented a premature sell until the price reached 4.1.
What is Next?
Good question! With this article, I will start writing some basic techniques I am learning. My big aim is writing a software that will allow me to trade 7 x 24. If you are interested in this development, you are very welcome to contact me.
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