This week, Cryptogpt explains how to use moving averages in crypto trading. learn more!
Table of Contents
- What are moving averages?
- Why should we use moving average?
- Can I use more than one moving average?
- How can I use moving averages in trading?
In the past, Cryptogpt covered a wide range of technical indicators and tools to help traders. You can find them in our trade analysis sections. And now, it’s time to cover one of the most popular indicators on TradingView, Moving Averages (MA).
In today’s article, we will discuss what moving averages are, and how to use them in trading. Let’s get into it!
But before that, you can learn how to use TradingView.
What are moving averages?
A moving average (MA) is a technical indicator that shows you the average price of a pre-set number of candles. For example, a 50-day moving average calculates the average price of the last 25 daily candles. To do this, the closing price of each candle is used.
The chart below shows the 50-day moving average on Bitcoin’s daily chart. As you can see, it shows the overall direction of the market in a simple way. This chart does so with little delay, as the moving average follows the price movement. So, it comes down only when the price starts falling. This so-called break should always be kept in mind! Shorter timeframe charts can be used to narrow the gap.
Why should we use moving average?
As discussed earlier, moving averages color the overall trend direction. When the chart is trending down, shorting is usually preferred over desire.
In uptrends, moving averages slope upward, and price usually trades above the MA. Shorter-term MAs, such as the 15-day moving average, are above longer-term moving averages, such as the 50-day moving average.
The further the price moves away from the moving average, the stronger the trend. However, this situation can also be taken as a warning sign as the price often reverts to the mean. In a bearish trend, the price trades below the MAs. In this scenario, the short-term MAs move below the long-term average.
The chart shows Bitcoin’s price action over the past year and its 50-day moving average. It illustrates well the function of moving averages and shows how prices retrace to the average line. The gray circled areas are instances where price tried to reverse the trend and failed. These failures often result in an acceleration of the trend.
Can I use more than one moving average?
Using multiple moving averages can help you anticipate transitions between uptrends and downtrends. In these transitional periods, long-term moving averages are flat-lined, while short-term moving averages cross the long-term average. These crosses are commonly called the Golden Cross and the Death Cross.
Check out our detailed guide on the Death Cross and Golden Cross!
How can I use moving averages in trading?
There are many ways to use moving averages in trading. The first method looks at moving averages as a type of dynamic support or resistance level. In this strategy, traders try to buy or sell a retest after the moving average is broken.
Ideally, the moving average lines up along the horizontal level, as seen in the chart below. Confluence is not required, but often increases the likelihood of a surface acting as a support. Traders can try to exit these trades when the price reaches another moving average or another horizontal level.
The chart below is an example of exiting a trade using a moving average, where a trader takes a long position after the SFP (more on this topic here), and makes a profit when the price moves into the moving average. Again, a confluence with a horizontal level increases confidence in the trade.
Overall, a moving average is an excellent indicator for developing a better understanding of trends. This can help you improve your trading. As a final note, it is unwise to blindly jump in when the price reaches the moving average. Your best bet is to see how it behaves once you get there, and then decide whether to take the trade. For example, Wicks can tell you which level is being respected through moving averages.
Author’s Disclaimer: This article is based on my limited knowledge and experience. It is written for educational purposes. It should not be construed as advice in any way shape or form.
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