Moving Average, abbreviated as MA, uses statistical analysis to average the stock prices (indexes) in a certain period, and connect the average values at different periods to form an MA. It is a technical indicator used to observe the trend of securities prices.
The MA was proposed by the famous American investment expert Joseph E. Granville in the middle of the 20th century. The moving average theory is one of the most commonly used technical indicators today. It helps traders confirm the market trend, judge the trend that will appear, and find the trend that is about to reverse. MA is a widely used technical indicator in spot, futures, stocks, funds, cryptocurrencies, and other derivative financial products.
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What Can Moving Averages Do?
MAs can give you an idea of the price trend, and tell you where the support and resistance levels. When the moving line is an upward mode, the price is moving up overall, vice versa. However, the price does not necessarily change within the MA range especially when the crypto market is strongly fluctuating and sideways trading occurs.
The MA can also act as dynamic support and resistance level. The technical traders will buy when the price drops and tests the moving average (support level) or sell if it bounces and touches the moving average (resistance level).
Types Of Moving Averages
1. Based On Length Of Time
MAs can be divided into short-term, medium-term, and long-term moving averages based on the length of time. The commonly used periods in moving average are 5, 10, 30, 60, 120, and 240 days.
Among them, the 5-day and 10-day short-term MAs are the reference indicators for short-term traders and are called daily moving average indicators; the 30-day and 60-day are medium-term moving average indicators, called quarterly moving averages; the 120-day and 240-day are long-term moving average indicators called the annual moving average indicator.
2. Based On The Calculation
A simple moving average, the simplest form of a moving average, is the arithmetic average line of prices in a specific time created by connections of the average of prices.
The formula is as follows:
A= average in period n
N= number of periods
An exponential moving average is a weighted average that gives greater importance to the recent price of a cryptocurrency on closer days.
The formula is as follows:
EMAt= EMA today
Vt= Value today
EMAy= EMA yesterday
d= number of days
Simply put, the EMA sets more emphasis on the recent data points, while the SMA sets equal weighting to all values.
How To Use The Moving Average In The Crypto Market?
To calculate the MA of a cryptocurrency is to remove the uncertainty of price fluctuation in a specific time and smooth out the price data through a constantly updated average price. The MA can be set to any time frame, thus it is useful for both long-term investors and short-term traders.
1. To Find The Trend
The MA can help you determine the trend. Just plot a single moving average on a chart. When price tends to run above the MA, it indicates that price is in a general uptrend. If the price tends to stay below the MA, then it signals that it is in a downtrend.
However, this is a kind of idealized state and will not always occur since the market is fluctuated and complicated. One way to solve this problem is to apply more than one MA on the charts, which gives you a clearer signal of whether the price is to go up or down. In an uptrend, the shorter-term MA tends to above the longer-term MA, and for a downtrend, vice versa.
Take the BTC/USDT daily chart as an example. We plot 10-MA and 20-MA and it can be seen that on the uptrend, 10-MA is above 20-MA.
You can also try to put more than two moving averages on your chart, which can help you decide whether to go long or short the trading pair. As long as lines are in order (shorter-term MA over longer-term MA in an uptrend, longer-term MA over shorter-term MA in a downtrend), then you can tell whether the pair is in an uptrend or a downtrend.
2. Use Crossovers To Enter Trends
Besides determining the price trend, you can also find out when a trend is to end or reverse. It helps indicate when is the time to enter the market and exit. A moving average crossover is to help.
A moving average crossover appears when two different MA lines cross over one another. It could signal that the trend is about to change sooner or later. When a shorter-term MA crosses above a longer-term MA, it is a buy signal because it indicates that the trend is moving up, which is known as a “golden cross.” When the shorter-term MA crosses below the longer-term MA, it is a sell signal, as it indicates that the trend is moving down, which is known as a “death cross.” But the crossovers don’t always tell the “truth” as the market is changeable.
3. Find The Support & Resistance Levels
The MA can act as dynamic support and resistance level, which could be changeable according to the recent price performance. Its function acts like a traditional support or resistance level.
Serving As Dynamic Support Or Resistance
Let’s look at the one-day chart of ETH/USDT, and then plot the 50 EMA. Now it is time to figure out if the 50 EMA serves as dynamic support or resistance.
Every time price tried to dip below 50 EMA, it acted as support and the price rebounded back up. But you should realize that it is a kind of idealized status, and the price won’t always rebound rightly from the moving average.
Trading Between The Range Of MAs
Sometimes, the price will slightly cross the moving average and then start to turn. There are also times when the price will completely cross a certain moving average. Thus some traders will only buy or sell when the price is in the range of the two moving averages.
Let’s take a look at the above 30-minute chart of ETH/USDT, and this time we use the 10 and 20 EMAs. You can see that price slightly dipped to the 20 EMA a few pips but proceeded to rise afterward.
Breaking The Moving Average
As mentioned before, prices do not always act as we expect and they can break, just like support and resistance level. Now let’s take a look at the 50 EMA on ETH/USDT 15-min chart.
We see that the 50 EMA acts as a strong support level almost for a day as ETH/USDT repeatedly rebounded it. However, as highlighted with the gray box, the price finally broke through and dropped off. Price then rebounded and tested the 50 EMA again, which formed a strong resistance level.
One nice thing about using MA is that it is changing, which means that you can just leave it on your chart and do not have to keep looking back in time to spot potential support and resistance levels. The only problem is figuring out which moving average to use and that is a challenge for traders.
Using moving averages is a way to smooth out price action. Simple moving averages are smoother than exponential moving averages. Longer period moving averages are smoother than shorter period moving averages. They are slower to respond to price action but will protect you from spikes and fake outs.
Using the exponential moving average can help you recognize a trend faster, but is prone to many fake outs. However, because MA is a lagging indicator, it can delay you from taking a trade and may cause you to miss some good trading opportunities. Still, you can use moving averages to determine the trend, the time to enter or exit the crypto market, and when the trend is coming to an end.