When it comes to indicators showing trend reversal, the “Moving Average” turns out to be the most popular choice.
The reason for this pick is that compared to other indicators, the moving average is easiest to read and understand. The indicator shows the average price for the selected number of days and creates a line to show you where the price is actually moving. For instance, you can select 50-day MA and it will show you the average price for the past 50 days. Or, you can select 50-minutes MA and it will show you the average price for the past 50 minutes. It is up to you what timeframe you are most interested in.
On a chart the “Moving Average” displayed as a line lagging behind the coin’s price action. It is a lagging indicator because it takes historical prices into calculation and hence can not predict the future price action. The wider is the timeframe the larger is the gap between the price action line and the MA line. Below is the chart to demonstrate the distance gap between the MA lines with different timeframes for Ethereum price (50-days MA, 100-days MA, 200-days MA).
The bigger is the MA’s length, the longer the new trend lasts if the price eventually breaches the MA line. In the example above when the price crosses over the 50-days MA this is considered to be a short-term trend reversal. If the price later crosses the 100-days MA this is considered to be a mid-term trend reversal. Consequently, if the price eventually crosses over the 200-days MA or any other MA with a longer period (>200) this is considered as a long-term trend reversal and it could be that the bullish/bearish trend will prevail for a long term (could be months or quarters).
Below is the example of ETH/USD price crossing the 200-days MA from above (23 May 2018), which was a signal of an emerging bearish trend. The bearish trend lasted 314 days until the next crossover of the 200-day MA and ETH had entered a bullish trend. Long-term traders and investors are looking for such signals to spot possible trend reversals.
As a rule of thumb, when the price of a cryptocurrency is above its MA, the market is having a bullish momentum. The larger is the gap between the current price and MA, the stronger is the trend. Conversely, when the price of a cryptocurrency is trading below MA, the market is having a bearish momentum.
When at least 2 Moving Averages are plotted on the chart, they can cross each other indicating a change of the trend. From the practical perspective, having both 50-MA and 200-MA is an optimal configuration and below is the example to validate the setup.
This is ETH trading to USD on Coinbase cryptocurrency exchange. There are 4 cases where 50 MA and 200 MA cross each other on a chart. When the shorter 50-MA crosses ABOVE the longer-term 200-MA , it's a bullish signal. When 50-MA crosses BELOW 200-MA, it is a signal of a falling market.
Check-out this quick backtest animation on ETH/USD to see how the market performed after the indicator had spotted crossovers. Performance is estimated in the projected return as if you would follow buy and sell signals:
What makes MA indicator truly unique is the variety of strategies you can use and combine. You can look for the price crossing over the MA line, you can look for both the price and MA lines crossing each other, and you can look for only MA lines crossovers like in the example with ETH/USD with 50 and 200 MA lines.
The magical power of Bitsgap is that by using Moving Average indicator you can find optimal entry and exit timing for automated trading bots and your smart trades. Below is the example of the BNB/USDT Sbot active bot and notice how it has managed to accumulate profits in a quote currency (USDT) on a rising market right after the bullish MA crossover was spotted.
When you spot a bullish MA signal it can be that the price is about to appreciate so you let the bot make profits on the upside momentum. On the other hand, when you spot a bearish MA signal (for instance, 50-MA crossing below 200-MA) this can be a perfect time to close the bot to lock in generated profits before the market starts falling.
Written by Dmitry Perepelkin