We already talked about candlesticks, which indicate something about the market sentiment at this very moment. Trends are very important when trading, and moving averages are an useful way to see which direction a certain asset is going. These moving averages are measured over a period of time, and therefore these trends are not there to signal a reversal, instead they show that a reversal has happened.
A moving average will always look like a line running through your charts. When prices are below this moving average, it means that an asset has lost its momentum and the trend is turning bearish. However, when the prices move above a moving average there’s a bullish trend happening. Generally you would need to confirm this using other indicators as well, like the MACD, RSI and Stochastic Oscillator. More about these in other guides.
Simple Moving Average
A moving average is the average value measured over the previous X amount of days. If you would make a 5-day moving average, you would take the value of an asset at one point on every day, and you would add those values up, and then divide them by the number of days. So it could look something like this:
7, 5, 4, (3 + 6 + 2 + 4 + 5) / 5 = 4
This would mean that the average price over the past 5 days, is 4. Data from further in the past, is being removed from the calculations. Each entry point is made up out of data from the past 5 days, and every time you move a day forward, one day is eliminated from your data set.
Take a look at the chart below, which represents the price of ETH against BTC. The blue line indicates a 5 step moving average, in this case these steps are hours. Around the 12th, 7AM this asset turned a bit bullish for the first time. After a long downfall the chart moved horizontal, follow by a big move upwards. Notice that every time the candle move above the moving average, there’s a bullish moment.
In this example the time intervals between each point are very small. For traders it’s very common to look at bigger trends, using 50, 100 or even 200 days moving averages. This way you’re able to see a bigger picture. However, this is only useful if you’re into long term trading.
If you want to dive into short term trading, there’s money to be made in trends as pictured above. Moving averages are a valuable indicator for trends, but they are not the only ones. Creating different moving averages in one chart can also give you interesting data.
Moving average crossover
We talk about a moving average crossover when two different moving averages cross their paths. When this happens, you confirm a shift in a market trend. Please notice the word “confirm”, as the shift already happened. If you are following moving averages and their crossover, you will never buy at the actual bottom and you will never sell at the actual top. But you can be pretty close to those points though.
In the example below we’ve added two moving averages, one 15 day MA and one 45 day MA. The 15 day MA is the faster moving indicator from the two, following the candlesticks much closer than the 45 day one. When this two lines cross, it confirms a bullish or bearish signal.
Late April there was a clear bullish trend on the value of Bitcoin to the dollar. And around the same time in May, a bearish trend was confirmed that would till July 20th. When a short term trend line moves below a long term line, we call it a bearish market. Early August was a bearish moment, while the last two weeks op July were very bullish.
It’s difficult to tell when it’s a right moment to jump in or jump out. The crossover moments are indicators, and when there’s a bullish crossover (so, when the shorter moving average crosses the longer one) it might be a good idea to wait a little bit, just to confirm that the bearish moment is over. “Buy at the bottom, sell at the top”, that’s what they normally say. This indicators can help you get close to that.
But obviously MA are lagging behind on what’s actually happening right now. For long term traders a crossover between the 50-day and 200-day SMA is often considered a heavenly beacon or a crossing of death, depending on which direction things are going. But even though there’s a strong bearish decline in a market, there’s still money to be made on the short term trading. But beware, none of this is without risk.