As we noted in a recent article, cryptocurrencies do not lend themselves to analysis of fundamentals like stocks do because cryptocurrencies do not have fundamentals like earnings, sales, property, or debts. Unlike commodities they have no use outside of the crypto world. That leaves technical analysis tools as the best means of guiding one’s crypto trading. Perhaps the most commonly used technical analysis tool is the moving average which begs the question, are moving averages good crypto trading tools? They certainly are if you learn to use then correctly.
What Is a Moving Average?
A moving average is a technical analysis tool designed to make it easier for traders to recognize evolving trends amidst the potential confusion of daily and even hourly rapid and vigorous price fluctuations. A moving average is a series of calculations and recalculations of an asset’s price over a set period of time. Common moving averages for stocks are the 100 day and 200 day but moving averages used by day traders can be in hours or minutes. The way they work is that all previous prices for a set range added together and divided by the number of the time frame. That calculation is repeated again and again. Thus, while the current crypto price may be jumping up and down and not giving any guidance to where the eventual price will be the moving average will show any trend that happens to be emerging over that time frame. It is common to use two separate moving averages. Doing so helps confirm a suspected uptrend or downtrend and can help identify support and resistance levels for a traded asset.
Using Moving Averages in Crypto Trading
When using moving averages or any technical analysis tool keep in mind that these are statistical tools that work best in markets with high volume and lots of liquidity. In the crypto world this pretty much means trading Bitcoin. Traders should be wary of using moving averages or any technical tool with thinly traded alt coins where there is simply no enough data for a technical tool to give useful results. Thus, we will refer to using moving averages to trade Bitcoin in this article. The first thing is to use moving averages to help recognize trends and the next is to help decide if an asset such as Bitcoin is likely to reverse an upward trend and fall or reverse a downward trend and rise.
Identifying Trends with Moving Averages
The price line of Bitcoin or pretty much any traded asset resembles “static” with the price jumping up and down minute by minute looking at such a price line it can be difficult to recognize the underlying trend. The value of a simple moving average is that it provides you with a smooth price line making any trend clear to see. This is the most basic value of a moving average.
Anticipating Bitcoin Price Breakouts with a Moving Average
Although recognizing a price trend is useful it is much more useful and profitable to anticipate a price breakout or reversal. This is where using two moving averages of differing time lengths comes into play. Traders learn how to recognize a golden cross and a death cross.
Moving Average and the Death Cross
When a trader is in a rising market and using a short term moving average and a longer term moving average they will be on the lookout for when the shorter moving average crosses below the longer term moving average. When this happens it is a strong predictor of an upward trend turning into a downward trend. It is referred to as a death cross and is where the trader will consider selling Bitcoin instead of buying.
Moving Average and the Golden Cross
When Bitcoin or any traded asset is in a downward trend that trend may come to an end and reverse. The trader will profit by anticipating the turnaround. One way to do this is to recognize a golden cross which is when a short term moving average moves above the long term moving average. Smart traders will pay attention to market volume and momentum indicators as well as their moving averages. However, correctly reading a moving average golden cross can be very profitable for the Bitcoin trader who can start buying at the bottom of a price decline before upward movement takes the cryptocurrency to greater heights.
Practice Makes Perfect with Bitcoin Moving Averages
Bitcoin trading requires that you know and use the right tools and it requires that you use them efficiently. The best way to do this is to use the software on your trade station to do simulation trading using real historical Bitcoin market data. The best approach never to risk your own money trading Bitcoin with moving average or any other technical tool until you can reliably profit in your “paper trading.”