Using Moving Averages In Your Trading

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Beginners Guide to Trading Moving Averages for the Crypto Market

Using candlestick formations in order to determine price movement from one direction or another is great for what it does within a more confined timeframe. The problem is, the level of detail that you get from candlestick formations is so granular, that it may be hard to determine the overall trend across the daily highs and lows of a particular cryptocurrency.

This is where moving averages come into play and why they’re one of my all-time favorite trading signals for both ease-of-use and reliability.

Moving averages will really help you break down the momentum of a particular crypto coin. These averages are represented by a simple line which gives an indication as to where a coins price was and is most likely going to be, in an easy-to-see format.

Let’s start off with one of the most basic moving averages…

Simple Moving Average

This moving average, as the name implies, is a simple line that represents the closing price of a cryptocurrency, which is averaged out over a period of time.

In layman’s terms, you simply write down the closing prices for say the last 30 days, add them all up, and then divide that total by 30. This will give you the average of that particular number set.

The most common simple moving averages that you’ll read about are the 50, 100, and 200 day moving averages. Each of these three moving averages will show the momentum during their respective time period (50 days, 100 days, or 200 days).

The only weakness behind simple moving averages is its inherent simplicity, where the data points are assigned the same weight, which affects the outcome of each one equally. This means if you have a price that is severely out of range, compared to the other price points, this can skew the simple moving average line, which in turn can give you inaccurate results.

Let’s look at an example for context…

Say the first four days of price action was at $3, $4, $4, $5, and then a whopping $25. The simple moving average line would then be centered on the average of $8. As you can clearly see, this major movement in price tends to greatly disrupt the averages.

Don’t worry; I cover a strategy further down this guide utilizing the exponential moving averages alongside simple moving averages, that will help facilitate the correction of this issue.

For now, let’s discuss the 3 most common types of simple moving averages.

50 Day Moving Average

A 50 day moving average measures the short-term market confidence. This moving average is consistently used by swing traders, due to its accurate representation of the market during a 24 hour period.

When price action is above the 50 day moving average, this indicates that you’re in a short-term bull market. The opposite rings true for price action below the 50 day moving average. This would clearly indicate that you’re in a short-term bear market.

Also worth noting, when candlestick formations are moving between bullish and bearish sides of the 50 day moving average, this indicates a “ranging period” where the market is undecided where it wants to go. Trading during these ranging periods is much riskier than trading in a substantiated trend (bear or bull trend).

As you can imagine, trading alongside a trend is much more predictable than trading sideways where the market sentiment has yet to be determined.

What’s interesting about the 50 day moving average is that it’s sensitive enough to show large institutional buys or selloffs. These price movements are recorded more accurately on this shorter-term moving average.

100 Day Moving Average

This moving average is considered a medium-term momentum indicator. These are characterized by sharp changes or reversals in the market and tend to include large economic or political movements. You can expect the 100 day moving average to move opposite of the primary trend that follows the 50 day. Much like the 50 day moving average, prices above the 100 day moving average are more long term bullish and prices below this line are bearish.

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200 Day Moving Average

As you might expect, the 200 day moving average is a crucial gauge for longer-term trends. This is what you would call the “big picture” or “birdseye view” on how a particular market is doing.

This moving average is not going to tell you where to place a buy or sell order on a day or swing trading basis, however it will let you know whether you need a hold on to a cryptocurrency for a while or if you should start thinking about exiting the market.

I typically use the 50/200 SMAs cross to get an overall feel for where the market is currently and the direction it will be headed when swing trading. I cover more on this strategy below under “The CCJ Moving Average Strategy”.

The Golden Cross

The Golden Cross is defined when the line of a short-term moving average crosses a longer-term line. This cross indicates that a bullish or bearish breakout is imminent. You can look at the cross as a warning of what’s to come (think red alert).

So for example, if you have a 50 day moving average cross over a 200 day moving average, this indicates that bearish sentiment is soon approaching. The same goes for bullish sentiment. If the 50 day moving average crosses under a 200 day moving average, this indicates that bullish sentiment will soon take over.

The reason I use the 200 MA as opposed to the 100 is due to the fact that there is a much larger separation between these 2 moving averages. The 50 and 100 MAs tend to overlap one another.

It’s important to note that bearish or bullish sentiment is soon approaching once these two lines move closer together. You don’t always have to wait for a cross, but it is preferred for confirmation.

Next let’s talk about one of the most utilized moving averages for both day and swing traders alike.

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 in crypto? 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.

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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.

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Using Moving Averages

January 31, 2020 by Daniels Trading | Tips & Strategies

One the most popular and versatile tools of technical analysis is the moving average (MA). MAs are classified as “lagging” indicators, meaning that they trail the prevailing price and are studies of previously occurring price action. MAs are not intended to predict breakouts or forthcoming trends in the market. Instead, they are designed to identify or confirm an established trend in pricing.

Types of Moving Averages

Traders calculate moving averages in a myriad of different fashions, each with a varying degree of sophistication as well as a specific objective. No matter what type of MA is being constructed, its value is derived using pricing data exclusive to previous periods.

The two most commonly implemented moving averages are:

  • Simple Moving Average (SMA)
  • Exponential Moving Average (EMA)

Simple Moving Average (SMA)

The SMA is the most basic variety of moving average. You can calculate an SMA by taking a collection of price values for a desired number of periods, then dividing the chosen value by the number of periods. As the SMA moves forward in time, replace the first price value of the series with the most current value, updating the calculation.

Exponential Moving Average (EMA)

You can calculate EMA in much the same manner as the SMA, except the most recent price values are assigned greater relevance or “weight.” As a result, the EMA attempts to reduce lag by giving more validity to the most recent price action. MA calculations may be as simple as the SMA or extremely complex. In many cases, hybrid MAs are constructed from mixing elements of the SMA and EMA with more radical concepts.

Applications of Moving Averages

Always keep in mind that MAs are limited in their predictive capabilities. In contrast to technicals — such as oscillators, volume indicators, or chart patterns — MAs do not aid in identifying market reversal or the location of a potential breakout.

However, MAs do provide useful insights into market behavior. Many technical traders and investors alike incorporate the use of MAs into their trading plans for use in the following areas:

  • Trend Identification
  • Pricing Momentum
  • Support and Resistance

Trend Identification

The number one trading axiom is “the trend is your friend.” A considerable number of trading methodologies strictly adhere to this rule, aiming to either get in on, or avoid going against, the current trend. Moving averages make trend recognition routine, because they are typically represented linearly on the pricing chart. The slope of the MA and its location in respect to the current price are both indications of a trend’s existence. If price action is above the MA, an uptrend is present; if below the MA, a downtrend is ongoing.

Pricing Momentum

Although MAs are not a momentum indicator on a stand-alone basis, traders frequently use them in concert with one another within a multitime frame context. Traders can compare MAs with short-term durations to MAs with longer durations in order to establish the relative strength of price action. For instance, if a short-term MA is located above a longer-term MA, then price action is currently trending upward. In the event that the short-term MA is also diverging from the long term MA, then the current momentum of price action has increased.

Support and Resistance

The location of a popular MA is often perceived to be a key technical level — and one that may prompt increasing market participation. Many traders view MA values as guidelines of when to enter or exit a trade. For instance, in the event that price crosses over an MA, it may be interpreted as an indication that the current trend is over, and an exit from opposing positions may be warranted. Conversely, this type of scenario may entice some traders to enter the market in anticipation of a fresh trend being confirmed.

Integrating Moving Averages into Your Trading Plan

Whether you’re a purely technical trader or an investor that makes decisions based upon fundamentals, MAs can be a valued addition to nearly any comprehensive trading plan.

However, selecting the most effective MA for your trading approach can prove to be a challenge. Each type of MA is a bit nuanced and is likely best suited for a specific product, market or trading style. For individuals new to technical analysis, or the marketplace in general, consulting an experienced market professional may be a great way to optimize the utility of moving averages.

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Daniels Trading is an independent futures brokerage firm located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading is built on a culture of trust committed to the firm’s mission of Independence, Objectivity and Reliability.

Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

The Benefits of Using Moving Averages in Forex Trading

The Benefits of Using Moving Averages – Spotting Trend Changes and Trading Signals.

Price movements of all actively traded securities are a measure of volatility and therefore take on the appearance of being very erratic.

To the untrained eye, the price chart of any given security resembles an indecipherable mess of squiggly lines with little meaning.

Even to an experienced chart analyst price fluctuations can be very misleading.

What is called for in order to eliminate these wild undulations and to enable the analyst to identify the underlying trend is a smoothing device, something to reduce the undulations and isolate the overall movement of prices.

This is the function best served by moving averages.

All averages of prices tend to fluctuate less actively than the prices from which they are derived:

The greater the number of days from which an average is composed, the more gentle and gradual are the fluctuations relative to the price action from which it is derived.

In his book, Commodity Futures Trading With Moving Averages, J.R. Maxwell provides a succinct account of the usefulness of moving averages when incorporated in a trading program:

The use of an average eliminates or reduces the distraction caused by the often sudden and relatively far-reaching daily price fluctuations, enabling the user to observe a smoother depiction of the trend changes as they occur.

This is one of the two principal reasons for the widespread use of various types of averages as trading tools.

The second principal reason is that these figures, when plotted as lines on charts, with the closing prices or other lines representing price action, will cross above and below one another as market trends change.

Two averages encompassing different numbers of price units (days) will cross over and under each other in the same fashion.

Such crossings, either by themselves or in combination with other signals, such as changes in statistical data concerning supply and demand, serve as trading signals for a large proportion of the people who speculate in the futures markets.

The Most Recommended Moving Averages Forex Trading Systems

These crossings are definite, easily observed signals in a fast-moving and frequently very confusing swirl of activity.

Clear-cut signs, such as these are, to buy and to sell, can be comforting to have under such conditions, especially when they appear to be well accepted by so many traders, and their use seems to be based upon solid logic.

The different forms of analysis involving moving averages are many and varied.

Many traders place heavy emphasis on the trading signals provided when two moving averages of the underlying security’s Priceline cross.

Others rely on a system involving a moving average or series of moving averages calculated from a moving average itself in relation to the underlying security’s price to generate trading signals.

Others still prefer to rely simply on a single moving average, which is plotted with the Priceline.

The results they obtain trading with these signals vary depending on the time frame of the averages used along with a variety of other factors.

Concludes Maxwell : “ A moving average is like any tool . It is essential to know its capabilities and its limitations before its potential value can be determined. Then, if it has any merit, the skill may be required to obtain the maximum benefit from its use.”

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For a more detailed discussion of moving average crossovers, please see The Essence of Moving Averages: What Every Successful Forex Trader Should Know.

Trading systems based on fast moving averages are quite easy to follow.

Let’s take a look at this simple system.

  • Currency pairs: ANY
  • Timeframe chart: 1 hour or 15-minute chart
  • Indicators: 10 EMA, 25 EMA, 50 EMA

Entry Rules :

When 10 EMA goes through 25 EMA and continues through 50 EMA, BUY/SELL in the direction of 10 EMA once it clearly makes it through 50 EMA.

(Just wait for the current price bar to close on the opposite side of 50 EMA. This waiting helps to avoid false signals).

Exit Rules :

  • option 1: exit when 10 EMA crosses 25 EMA again.
  • option 2: exit when 10 EMA returns and touches 50 EMA (again it is suggested to wait until the current price bar after so-called “touch” has been closed on the opposite side of 50 EMA).

Advantages :

it is easy to use, and it gives very good results when the market is trending, at big price break-outs and big price moves.

Disadvantages :

the Fast moving average indicator is a follow-up indicator or it is also called a lagging indicator, which means it does not predict future market directions, but rather reflects current situation on the market.

This characteristic makes it vulnerable: firstly, because it can change its signals anytime, secondly – because need to watch it all the time; and finally, when market trades sideways (no trend) with very little fluctuation in price it can give many false signals, so it is not suggested to use it during such periods.

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