Beginners Guide to Trading Moving Averages for the Crypto Market
September 21, 2018
Chart Patterns | Latest News | Technical Analysis
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.
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.
Exponential Moving Averages
This moving average, also known as EMA, is built upon a “linear weight” moving average. It includes an exponential multiplier which is calculated by a rather complex equation. No need to bore you with all the mathematical details. All you need to know is that it assigns more importance to recent price movements, thus allowing a trader to get a better idea of where price momentum is headed.
EMAs are much faster than simple moving averages (SMA) and will give you a rather quick indication as to when to enter or exit a trade. The advantage to this moving average is that it reacts much faster to price changes.
Swing traders typically use the 5, 10, 20, and 50 day exponential moving averages for their trades. The most popular being the 20 and 50 EMA crossovers which generate quick buy and sell signals. These are the moving averages that I tend to use for my daily trading as well as the 50 and 200 day SMAs.
The CCJ Moving Average Strategy
I’ve used a wide variety of moving averages during my long and arduous cryptocurrency trading career. The ones that I typically tend to rely on the most and have had the most success with are the…
20 and 50 EMA
50 and 200 SMA
I don’t recommend using these on time frames below five minutes. You can use one or both of these moving average pairs, however if I had to choose just one I would use the 50/200 SMA.
The 20/50 EMAs will show you where price movement is headed in the short-term. 50/200 SMA will show you where the price is headed on a mid-term basis, which is great to evaluate where overall sentiment is headed. It’s important to note that you can use the 50/200 SMA on the 15 minute timeframe and above. Anything below that can give you false signals.
Like always, a picture is worth 1000 words, so I’ll give you a few examples and setups of each.
Let’s Wrap This Up…
Moving averages is one of the more simple strategies you can start utilizing today within your current cryptocurrency trading regimen. Whether you’re day trading, swing trading, or investing, you can use these moving averages to get a clear indication as to where the market is currently at and the sentiment it’s moving towards.
Using these moving averages in combination with indicators, candlestick formations, and charting patterns can provide you with a remarkable trading strategy as well as clear-cut entry and exit signals which will have you winning the majority of your trades.
As always, leave a comment below and let us know if you have any questions.
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