What are moving averages?
Moving averages are the most popular and simple technical indicators. A moving average is a indicator technique called “lagged” that traders and investors use to determine the direction of the trend.
We talk about retarded, because the indicator follows the price. Its fluctuations are a function of those of the price of the asset.
A moving average is the average price of an asset over a period of time.
It can be calculated over different periods, ranging from a few seconds to several months. However, the most common measures are 50 days, 100 days and 200 days. You also often see these numbers used on weekly charts: 50 weeks, 100 weeks, etc.
Moving averages to identify the trend
Moving averages are used to smooth the volatility of fluctuations in order to reveal a general trend. They let you know at a glance whether the market is going up or down.
In March 2018, when Bitcoin price broke below the 200-day exponential moving average, it confirmed the bear market and a change from an uptrend to a downtrend.
Moving averages as support and resistance
The use of moving averages goes further. They are sometimes used as dynamic support and resistance, which move, as opposed to fixed horizontal or oblique support or resistance.
On this chart of Bitcoin, we see that the 200-day moving average acts as dynamic support for the price before then acting as dynamic resistance.
What moving average to use with cryptocurrencies?
Cryptocurrencies are volatile, which is why I use the 200-day moving average in my charts. Not only does it allow me to take a step back and take a longer-term view, but the 200-day moving average is often seen as the barrier that separates a bull market from a bear market.
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When the price moves above the 200-day moving average, the cryptocurrency is considered to be in an uptrend. And when the price moves below, the market is considered bearish.
I also noticed that the 200-day exponential moving average often acts as dynamic support or resistance.
Combine moving averages to generate trading signals?
It is common to see analysts or traders using one or more moving averages to generate trading signals. The crossing of moving averages is sometimes taken into consideration to assess a change in trend.
Financial adviser Brett Sifling at Gerber Kawasaki, a California-based wealth management firm, said he prefers using a combination of the 200-day long-term moving average and the 50-day short-term moving average.
It then takes into account the 50-day moving average for short-term fluctuations, and considers the 200-day moving average for trend changes.