Moving Average (MA) explained for crypto trading - how does it work?
In today’s article, we’ll be taking a moment to talk about a cryptocurrency trading indicator called Moving Averages. This is an important trading signal that can be used to make better trades and to take more profits.
It’s very easy to learn and if you’re a beginner, it should be one of the first trading signals that you include in your technical analysis strategy. It can also be used in conjunction with other easy to use trading signals like RSI, which makes it even more helpful to know how to use it.
What is it though and how does this indicator work? How can you use moving averages to your advantage? What exactly does the moving average tell you about a cryptocurrency coin or token? We’ll answer those questions and more for you in just a second.
What is Moving Average indicator in cryptocurrency trading?
The Moving Average indicator is a way to calculate the average of an asset’s price over a specific amount of time. The exact time period can be up to you and can range from just a few days to even 100 days depending on how far back you want to chart the price of the asset you’re looking at.
This is a very basic but useful technical analysis trading signal which beginners can use to get a better idea of what the price of a token or coin will likely be doing in the future.
When using Moving Averages, you’re looking to see the course that the cryptocurrency’s price has taken over a set period of time. By doing so, you can often get a good idea of whether it’s a good time to buy or sell and it allows you to ignore much of the noise that’s contained within the normal chart, making this a great strategy for beginners looking to get in on technical analysis.
How does MA in crypto work?
Moving Averages are not hard to calculate at all. All you have to do is to choose your time frame, for example, five days. You would then take the closing price of your chosen asset for each of the previous five days and add them together.
Then you would divide the total number by the number of days for the period of your moving average to get the appropriate figure. This will give you a trend line to follow that can help you in your trades.
The simplicity of moving averages is part of what makes it so attractive to new cryptocurrency traders. Don’t be deceived though, because it can also be very useful. While you can’t always depend on Moving Averages by themselves as an indicator, they are very good at confirming other indicators that you may be following.
What can cryptocurrency moving average tell you?
The moving average is a great way to establish a trend line to follow when making your trades. It helps you to ignore abnormal fluctuations and zero in on the real price average.
This can help you to figure out whether a purchase is really a good deal or if you could potentially be fooling yourself into paying too much for your coins or tokens.
You can also use the MA to help establish support and resistance lines. This can be very helpful because you’ll be able to tell if the current price for an asset is supported by the market or if it will bottom out soon. Using this information you can decide when the best time to take profits or accumulate more coins or tokens is.
Crypto moving average example
Jimmy has had his eye on a particular cryptocurrency token for some time. However, he’s not sure whether he should purchase it yet or not. He decides to use moving averages as a basis for his purchase decision.
He decides that a 10-day MA should be enough for him to see a pattern that will satisfy him. He takes the closing price of the asset on each of the past ten days. He then adds these numbers together and divides that number by 10.
He uses his chart to plot out his trend line and sees that he has gotten an average price that seems to support his theory that this is a good move for him. He decides to purchase the asset and wait for it to go up in value.
Jimmy waits for a few days and sees that he was right. The price of the token has gone up. He can continue to hold or he could even flip his newly acquired tokens and using moving averages to make more profit.
How MA price is calculated?
The moving average is calculated by adding together the closing price of an asset over the number of days you’d like to plot a trend line for. You would then divide that number by the number of days you have marked on your trend line. This would give you the moving average for an asset which you could use to your advantage for crypto trading.
Why moving average method is used?
The moving average method is used in order to pinpoint when to buy or sell an asset. This can be useful for you if you plan to do any short term trading. The moving average can help to make more profits and see trends you might otherwise miss. That makes MA good for a variety of trading strategies such as scalping, day trading, swing trading and more.
They can also help you to establish support and resistance levels so you can better predict exactly which direction a crypto asset is going to go. While the moving average should not be your only indicator, it’s a great addition to your trading tool belt, and it’s so easy to learn that there’s really no reason to not use it.
You should also keep in mind that there’s more than one kind of moving average indicator. While the simple moving average is the easiest, there are other types which could be useful for cryptocurrency traders as well such as weighted averages. It might be a good idea to learn to use several types of these indicators to make the most possible profit.
MA advantages for Bitcoin and cryptocurrency trading
Moving averages are advantageous to crypto trading because they can be used to view a window as small or as large as you want. Since cryptocurrencies tend to be particularly volatile, you can also use them to ignore out of the ordinary price dips or highs. The moving average allows you to see the trend for what it really is.
It also allows you to clearly see where support and resistance lines are. This is important for deciding whether or not the price of an asset is justified and supported by the market. Using this you can truly decide when a coin or token is trading at a beneficial price for you.
Moving average trend
Using the moving average method you can establish useful cryptocurrency trend lines. You could actually even do more than one MA calculation so that you can see the big picture and confirm your theories.
These can be plotted straight on to the chart, and if you’re using a tool like Bitsgap, then you won’t even have to leave to plot out your TA. You can draw right on the live chart and have everything you need in one browser tab, which is really handy.
MA and RSI
Moving Averages are generally used to see the momentum of a crypto asset. However, they can be used successfully in conjunction with the Relative Strength Index to confirm your ideas of one or the other.
RSI measures the strength of an asset’s price, and this can help you to be sure that you’re making a wise decision. RSI is also pretty easy to learn and so this makes it a great combo for beginners who are looking to get into technical analysis.
Moving average vs weighted average
While a moving average simply adds all of the data together to come up with a baseline, the weighted average allows you to specify which are most important. You can use this to add more weight to the most recent price points.
Since some older cryptocurrency price information may not be as relevant and you might want to have more weight on the newer price points in order to get a more accurate result when plotting your trend lines.
How does simple moving average (SMA) work?
The simple moving average is one of the easiest ways to use MA in your crypto trading strategy. All you need to do is add up the closing price of all of the days you want to be included in the average for a chosen coin or token.
After that, you’ll need to take this number and then divide it by the number of days you want to plot. This will give you a simple moving average for that time frame.
SMA vs exponential moving average
The exponential moving average is a type of weighted moving average. It puts more focus on the most recent price action, whereas a simple moving average will compare all price action equally.
The EMA can respond faster than other indicators to recent price changes, and it might be a good strategy to use if you’re trading a particularly volatile asset.