Do you enjoy gathering with your buddies to discuss the latest big sporting events? You’ve probably placed some bets on who you thought would win at the Super Bowl, World Cup, or other championship play-off.
Sometimes your prediction was right and you won BIG while other times you lost and your friends made you dress up in a chicken suit while making clucking sounds in the middle of the road (sorry to bring up bad memories again Brian).
Analyzing past performances can help lead to better strategy planning, not only in sports but also in crypto.
Today we’ll be discussing moving averages and how they can help cryptocurrency traders predict future prices of crypto assets. There are several moving average methods to use, each with its own unique calculation.
In this article, you ‘ll find answers to:
1- What are moving averages?
Moving averages (MA) are one of the most important indicators for technical analysis. They show the average value of a data set/series over a given period of time. For example, when looking at a pricing history chart for Bitcoin, we’ll use moving averages of 20, 50, and 200 days to assess how much the price has increased or decreased between these time periods.
Traders generally look at these moving averages from the past to predict the potential future price of a cryptocurrency due to trends in its market fluctuation history. There are three types of moving averages, simple (SMA), weighted (WMA), and exponential (EMA).
Using moving averages to assess previous price points can help traders plan their moves more effectively.
If the price is below a calculated moving average, that means it’s a “resistance”. When a price becomes resistant it means there might be a lot of sellers waiting for the price to continue diving before they buy.
If the current price is above moving average, then it’s considered a “support”. If you discover a support, you might want to place a buy order once the moving average approaches a price drop since this is most likely when traders will start buying in.
2- What are moving averages used for?
Moving averages signal an upward, downward, or horizontal trend, but at times these signals aren’t always accurate. The shorter the time, the more sensitive the indicator is and the faster it responds to price changes. If the time chosen is too long, the indicator may give false signals.
When major trends occur, such as huge fluctuations in price, moving averages help identify periods of price consolidation within the trend. During price changes, moving average indicators help to identify support-resistance levels.
An important issue to be aware of is that during a longer time frame, a shorter moving average should be used.
The moving average calculated in a long time period generally stays behind the price movement. While moving averages are not as effective as trend lines, they are helpful in measuring how fast prices are moving. The probability of a trend continuing is estimated by looking at whether the price is below or above the average.
Note: If you’re a new trader, it’s recommended to use only one type of moving average and two different time period data-sets when creating a strategy.
For example, if you choose to use MA then you’ll mainly use 50 days and 200 days when assessing the data of a cryptocurrency coin. When the 50 day (lower data set) crosses up to the 200 day (higher data set) value, then price tends to increase. This is known as the Golden Cross. On the other hand, if the 50 day MA crosses down the 200 day MA then price tends to decrease and this is known as the Death Cross.
3- What is a Simple Moving Average?
The simple moving average (SMA) is the most widely used moving average.
An example of an SMA calculation is taking the closing values of the last 9 days for a crypto asset along with its resulting values and then divide by 9. This formula calculates the simple moving average over this 9-day period. The SMA for the 9 days is calculated automatically and you can change the time period on Tradingview.
You will get different price levels as support and resistance for different time lengths.
Below is the SMA as support and resistance on a BTC/USDT 1 day chart.
Below is the SMA Golden and Death Cross on a BTC/USDT 1 day chart.
After the Golden Cross signal, BTC/USDT pair’s price on Binance increased 167.74% from where the 50 day SMA crossed up the 200 day SMA to its highest price. As you can see, Golden cross is a buy signal but you need an extra strategy to sell or you can simply wait to sell for the price to crossdown the 50 day MA. Still profitable!
4- How to use a Weighted Moving Average (WMA) to develop a strategy?
The purpose of this method is to give more importance or “weight” to the latest price movements than the initial price movements. In short, this method takes the recent conditions of the market into consideration more than a simple moving average.
To build a strategy, you must be aware of what the Golden/Death Cross is. Basically, it is the same concept as the example above but price levels will be different due to the calculation method. You have to backtest to find out which one works well for you! First you need to add the WMA indicator twice on Tradingview to use WMA to detect a Golden or Death Cross.
How to add a WMA indicator to Tradingview Charts?
In default settings, WMA and other moving averages are calculated for 9 day lengths. You can simply change the length in the settings.
Let’s take a look to support/resistance levels and Golden/Death Crosses based on WMA.
WMA works fine as support and resistance, as you can see Death and Golden crosses are lagging to price movement. That means, the signal for both Golden/Death crosses came late, price moved to that direction earlier.
5- What is the exponential moving average and how to benefit from it in your strategy?
Exponential moving average is a moving average calculation method that focuses more on current data by prioritizing the moving averages of the first and last days.
The weights loaded on the data decrease exponentially over time and are consequently called the exponential moving average. The EMA reduces lag to price movements compared to MA and WMA.
How to add an EMA indicator to a Tradingview Chart?
As all moving averages, EMA’s default length is 9 on Tradingview. You can simply change the length on settings.
EMA Support-Resistance and Golden-Death Cross Levels.
* 8-13-20-50-100-200 day moving averages are among the most frequently used.
6- What is the Relative Strength Index (RSI)?
The Relative Strength Index (RSI) is an indicator that enables the prediction of the direction of short and medium-term trends. It’s calculated by comparing the closing values of the relevant period with the previous closing values of the same period.
If you use different timeframes (1 hour, 2 hours, 1 day, etc) RSI shows strength over the previous 14 hours for 1 hour charts, 56 hours for 4 hour charts and 14 days for 1 day charts.
There is a harmonious outlook between the price chart and the RSI. Since the RSI indicator reacts in a short time, it’s seen moving before the price from time to time.
RSI is all about trend strength. Think of it this way, if you are competing in a 1000 meter-long race and run 100 meters in 12 seconds, does it mean you are going to run each 100 meters in 12 seconds? Or, will you run slower than 12 seconds because your body is not fresh and is now tired?
RSI reference values are 30-70 levels. If the RSI is less than 30, it’s an oversold zone and indicates that the trend may reverse. If the RSI is greater than 70, it indicates an overbought zone and signals that the trend may reverse.
It’s always good to keep in mind that in a bull season, price increases rapidly above the RSI 70 level, and in a bear season price decreases rapidly when the RSI level is less than 30. Therefore, RSI itself is not enough to confirm trend reversals.
As it’s seen in the chart below, even though RSI decreased around 37.74%, the price went up 11.65%. Why? Because RSI is calculated based on the last 14 candlesticks, even though it shows some weaknesses of the trend, it doesn’t mean price decrease is sudden.
You should always be aware of where horizontal or trend support/resistance zones are. These situations are known as divergences, we’ll explain these in a later article.
There are certainly a lot of technical terms associated with moving averages, but understanding how they work can really help you when trading!
If you now have a better understanding of the types of moving averages and how they work then tell us below in the comments. Feel free to ask any related questions there too.
And now a meme from our community….