Moving averages are a popular indicator in all financial markets. Cryptocurrency is no exception. The purpose of a moving average (MA) is to smooth price action over a certain amount of time.
Moving averages are a lagging indicator which means they are based on previous price action. Keep this in mind when you are using them in your cryptocurrency trading strategy.
Using a moving average
When you set up your moving average, you can modify how many periods to take into account. A period refers to a unit of time based on the timeframe you are observing on the chart.
For example, if you have a moving average with the period of 21 and you are looking at the hourly chart, the moving average will be smoothing the price based on the last 21 hours of data. If instead you are on the daily chart, price will be smoothed using the last 21 days of price action.
Types of moving average
There are two types of moving averages. The first is the traditional moving average, which is often referred to as a simple moving average. Second is the exponential moving average, which is a weighted moving average that gives more weight to recent prices.
What time period is right for me?
The length of MA you use should depend on your trading style.
If you are a shorter-term trader, a shorter moving average will be more effective for your trading style. However, if you are a longer-term trader or investor, you’ll likely do better with a long moving average.
Trading with moving averages
Support and resistance
A moving average is expected to act as a form of support and resistance. As with most indicators, the longer the time frame you are using, the stronger the support or resistance.
Notice how many times the price bounced off the 50 MA in the picture below as resistance and support.
The slope of a moving average, on a longer time frame, can help you define a trend.
It’s very simple. If a moving average is sloping upwards, this supports the fact that the asset is in an uptrend.
Similarly, if the moving average is sloping downwards, it’s probable that the asset you’re assessing is in a downtrend.
Notice how the slope changes towards the end of the chart below, suggesting price has entered into a downtrend.
Remember, a moving average is a lagging indicator. A moving average slope only helps to define a trend. A single moving average cannot be used to spot the transition from an uptrend to a downtrend.
Moving average crosses are a popular trading signal. To trade crosses you need to have two or more moving averages on your chart. To avoid cluttering the chart, most traders use just two. One of the moving averages must be longer than the other.
Once you’ve got a short-term MA and a long-term MA switched on, watch out for crosses. Here’s what they mean:
- Short MA crosses above long MA: bullish trading signal
- Short MA falls below long MA: bearish trading signal
Here are a couple of examples.
In the picture below you can see the price of Bitcoin triples after the 9 MA rises above the 50 MA on the 1D chart and creates a bullish cross.
Notice the bearish cross in the picture below and the large drop in price that followed.
Make moving averages part of your trading arsenal.