Cryptocurrency markets and trading as you may have gathered by now is extremely volatile. That might be the understatement of the year, but there is no getting around it.
Because it is a new and emerging market which is booming. Plenty of opportunities arise and plenty of “opportunities” fall.
Coupled with the fact that the market is extremely emotionally driven, it creates a rollercoaster of emotions and this reflects in the charts.
Personally, I think everyone should grow up and stop selling the second their project dips a little but that is just my opinion…
In all seriousness, there are ways to tame and master the volatility and one of those ways is using a moving average (MA).
The moving average is a simple enough one to get your head around. But first, you need to understand a few key terms:
Time period – If I set a 10MA, this means whatever time frame you are using i.e 4-hour chart or daily or whatever… The 10 refers to the 10 previous candles. If I had a 20 this would be the 20 previous candles and so on.
The simple moving average (SMA) – This is in our 10SMA example this is the average price across 10 timeframes/candles.
The exponential moving average (EMA) – This is an example of a weighted moving average. It gets this name because it gives more weight to the most recent candles. This helps the EMA use more recent data across the time frames selected. For example, in a 10EMA candles 8, 9 and 10 will be taken in to account more than candles 1, 2 and 3. Clever stuff.
In effect, the MA is smoothing out all the noise and there is a lot of it in crypto.
The colour coordinated MA trendlines can be seen on the key at the side of the chart. The way the candles are placed in relation to the EMAs can tell us a lot.
So now we have established what the MA is, how do you use it?
Smaller time periods i.e 5MA and 10MA are better for short term trades on low timeframes (less than 1 day). This is because you are only receiving information in the form of the last 5 or 10 candles respectively. This wouldn’t be ideal if you were using a 5MA to work out the moves of Bitcoin over the next few months when looking at the daily chart.
The larger the number of time periods 20, 50, 100, 200 etc. the more average data. This is why you would use these larger MAs for medium to long term trades.
That is all well and good but what does the MA actually tell you about the future direction of the chart? After all, the MA is a lagging indicator, meaning it shows you, data from the past, that’s no good!
Well… it can be actually.
Depending on where the MA is in comparison to the current price can give a few key hints.
Trend – If the price/current candle is below the MA then this indicates a downtrend. The current price is lower than the average price of the last however many candles. This is naturally bearish.
If the current candle is above the MA this tends to be bullish as the current price is above the average price of the last x amount of candles. This is naturally bullish.
The direction of the trend – If the price is making its way down towards the MA this signals the direction of the trend (duh…) and the same goes for price moving upwards towards the MA. That is obvious… But, the crossing over of the MA is key here.
If a candle on a low time frame say the 1-hour chart crossed the 10EMA and closes above it at the hour-mark, this is a buy signal. Equally, if the price closes below the 10EMA (for example) this would be a sell signal.
Support and Resistance – Moving averages are great for support and resistance buying/selling too. If the price is moving down towards the MA you could see which side of the MA it closes and set up a trade accordingly.
If the price touches the MA and closes above it, this could be used as a support bounce and trigger a buy order. Equally, the MA could be seen as resistance and bounce of the MA and trigger you to sell.
This would allow you to buy back at a lower/better price and then try to break the MA again. If it closes above it let it ride until it moves back down to the MA again and start over.
How far away is the price from the MA? As discussed above the further away the more indicative of an upward or downward trend. As you move towards the MA this is when trends can be reversed if the MA is crossed.
Using Multiple Moving Averages
I like to have a few moving averages on my charts, 3 to be exact. I use the 10, 20 and 50 as these are common and typically used. Other common indicators are 5, 100 and 200. As with anything the more people that use the MA or any indicator for that matter the more reliable it will be.
As the more recent moving average i.e. 10MA move and crosses above longer MA i.e. 20 or 50MA this is a bullish signal.
Lower MA crosses above longer MA = bullish
Lower MA crossing below longer MA = bearish.
Why is this? Well, the more recent average price is higher or lower than the longer/greater average prices. This indicates trends in the short term.
These cross overs can also be used as confirmations to signal a buy or sell order. This used with the actual price in comparison to the MA is a really useful tool when trading.
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Next, make sure you have selected your desired market from the drop-down box. It might be worth noting, don’t pick the chart let the chart and set-up be the decider. By that I mean don’t force a trade because you are married to that particular coin. If there is a good opportunity, go for it.
We will take a look at how to set up your moving averages on AAX.
Hit the full-screen button at the top of the chart.
Search for “EMA” and then click “Moving Average Exponential”.
Click settings and change the length to 10. This means it will take in to account the previous 10 candles for each MA.
Once you are done, repeat this step 2 more times to add the 20MA and 50MA.
There are other key moving averages such as 5, 100 and 200. Whatever you use ensure they are commonly used. This way the indicator you are using is also being used by other traders around the world. This makes it reliable and more likely to amount to successful trades.
Let’s take a look at what the chart is telling us and put your new-found education into practice.
Lets zoom in on “1”
The 10 and 20EMA were acting as support until the candle closed below the 10,20 and 50MA. This triggered a downtrend. At the same time, the lower time period EMA (5EMA) crossed over the larger time frame EMAs.
This is a big bear flag and signals and a downtrend. This may be a good time to sell if you are day trading.
“2” shows that the MA has now flipped as the price keeps banging its head against the resistance.
“3” – the candle closes above the 10EMA and the 10EMA crosses above the 20EMA. These are bullish moves and signal an uptrend. Throughout the rest of the move, the candles consistently close above the 10EMA and then finally reach above 20EMA and the 50EMA.
The 10EMA line then crosses the 50EMA. These are all uptrend signalling moves that played out from the initial candle closing above the 5EMA at the start of the move.
Tip – use ctrl + two-finger scroll for better zoom in/out.
Finally, if you are trading you should always consider using a stop loss. You can use the EMA levels to place a stop loss just below an EMA line in an uptrend and just above in a downtrend.
This stop-loss would effectively prevent you from losing too much percentage-wise if you are wrong about a trade. I know, I know you aren’t wrong. Again, I get it… say it louder for the people at the back “the market is the wrong one”, I get it…
Setting a stop loss on either side of the EMA is a great safety precaution and stops you from being too overexposed especially if you can’t be sat at the laptop all day staring at the chart.
If you found this useful, set the reminder to our social channels as I will be going through more technical analysis techniques you can use to be a profitable trader.
Please bear in mind this is not investment or financial advice. I am a complete moron. Please don’t invest more than you can afford to lose, the crypto markets are extremely volatile at the best of times.
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