Trading Cryptocurrency With Moving Averages

Key Takeaways

• Moving averages (MAs) help traders identify market trends by smoothing out price data, making it easier to see the overall direction without the noise of short-term fluctuations.

• Popular strategies like the Moving Average Crossover, MACD, and Bollinger Bands use moving averages to generate buy and sell signals, identify support and resistance levels, and measure market momentum.

• Moving averages can be used in risk management by setting stop-loss levels and combining them with other technical indicators to create more robust trading strategies.

• Moving averages are accessible to traders of all skill levels due to their simplicity, but they should be used in conjunction with other indicators and continuous learning to maximise effectiveness.

• Setting up moving averages on trading platforms like the Crypto.com Exchange is straightforward, allowing traders to easily integrate these tools into their analysis.

Introduction to Moving Averages

One of the most critical components of successful cryptocurrency trading is technical analysis, which involves using historical price data to predict future market movements. Amongst the various tools available for technical analysis, moving averages (MAs) stand out due to their simplicity and effectiveness. 

This article delves into the intricacies of trading cryptocurrency using moving averages, providing insights into their types, application, strategies, and real-world examples.

What Are Moving Averages?

Moving averages are statistical tools used to analyse a set of data points by creating a series of averages of different subsets of the full data set. In the context of trading, moving averages smooth out price data to help identify trends and potential reversal points.

Below are the three main types of MAs:

• Simple Moving Average (SMA): The SMA is calculated by adding the closing prices of an asset over a specific number of periods and then dividing the sum by that number of periods. For example, a 10-day SMA takes the sum of the closing prices over the last 10 days and divides it by 10.

• Exponential Moving Average (EMA): The EMA gives more weight to recent prices, making it more responsive to new information. It is calculated using a complex formula that includes the previous EMA value, making it faster to react to price changes compared to the SMA.

• Weighted Moving Average (WMA): Similar to the EMA, the WMA assigns different weights to each data point, but it does so in a linear fashion. The most recent data points have the highest weights, and the weights decrease linearly.

How to Use Moving Averages in Cryptocurrency Trading

Moving averages play several vital roles in cryptocurrency trading:

• Smoothing Out Price Data: By averaging out price fluctuations, moving averages help traders see the underlying trend more clearly without the noise caused by short-term volatility.

• Identifying Trends: Moving averages can help identify whether an asset is in an uptrend, downtrend, or moving sideways. For instance, when the price is above a moving average, it is typically considered an uptrend.

• Support and Resistance Levels: Moving averages can act as dynamic support and resistance levels. Traders often use them to identify potential entry and exit points.

Popular Moving Average Strategies for Crypto Trading

Several strategies utilise moving averages to help traders make decisions.

Moving Average Crossover Strategy

This strategy involves using two moving averages (e.g., a short-term and a long-term) and looking for crossover points. A common example is the Golden Cross, where a short-term moving average crosses above a long-term moving average, signalling a potential buy. Conversely, the Death Cross occurs when a short-term moving average crosses below a long-term moving average, indicating a potential sell.

In addition, combining volume data and MA signals can help confirm the strength or weakness of a trend. For instance, when the price crosses MA with a high volume, it is generally considered more reliable than a crossover on low volume.

Moving Average Convergence Divergence (MACD)

The MACD is a momentum indicator that shows the relationship between two EMAs. It consists of the MACD line (the difference between the 12-day and 26-day EMA), the signal line (a 9-day EMA of the MACD line), and a histogram showing the difference between the MACD line and the signal line.

Bollinger Bands

Bollinger Bands use a moving average (typically a 20-day SMA) and two standard deviations above and below it to create a band. The bands expand and contract based on market volatility and can be used to identify overbought and oversold conditions.

Dynamic Support and Resistance

Using moving averages as dynamic support and resistance can help traders identify potential entry and exit points. For example, a trader might enter a long position when the price touches the moving average and then bounces off it.

How to Use Moving Averages on the Crypto.com Exchange

The Crypto.com Exchange offers TradingView’s MA feature, which is available to anyone using the exchange, even without having to log in.

To use moving averages, first open the Crypto.com Exchange Market Chart.

The default settings show three moving averages: SMA for 7, 25, and 99 days. Users can hide these individually by clicking on the eye icon or collapse their description by clicking on the arrow below the rows.

Clicking on the gear symbol for settings allows users to change their colour and style of line.

More importantly, users can move between SMA, EMA, and WMA, and adjust the MA time frame. For this, change the number in the ‘length’ field to define the averaging period.

How Traders Use Moving Averages to Predict the Crypto Market

To understand the practical application of moving averages in cryptocurrency trading, let’s examine a few examples.

Bitcoin 2017 Bull Run

During the 2017 bull run, Bitcoin’s price often found support at the 50-day EMA. Traders who recognised this pattern and entered positions when the price bounced off the EMA would have significantly profited.

Ethereum 2018 Bear Market

In the 2018 bear market, Ethereum’s price repeatedly encountered resistance at the 200-day SMA. Traders using the SMA to identify shorting opportunities could have capitalised on the downtrend.

Pros and Cons of Using Moving Averages in Crypto Trading

Moving averages have several advantages and disadvantages.

• Advantages
  • Simplicity and Ease of Use: Moving averages are straightforward to calculate and interpret, making them accessible to traders of all skill levels.
    
  • Effectiveness in Trending Markets: Moving averages work well in trending markets, helping traders identify the direction and strength of the trend.

• Disadvantages
  • Lagging Indicator: Moving averages are based on past price data, so they lag behind the current price. This can result in delayed signals, which may not be ideal for short-term trading.
    
  • Less Effective in Volatile or Sideways Markets: In highly volatile or range-bound markets, moving averages can produce false signals, leading to potential losses.

Risk Management With Moving Averages

Risk management is crucial in trading to protect capital and minimise losses. Moving averages can be incorporated into risk management strategies in the following ways:

Setting Stop-Loss Levels: Traders can use moving averages to set stop-loss levels. For example, placing a stop-loss order just below a moving average can help protect against significant losses if the price moves against the trade.

Combining With Other Risk Management Tools: Moving averages can be combined with other technical indicators (e.g., RSI, MACD) to enhance risk management. This combination can provide more robust signals and reduce the likelihood of false positives.

Beginner Tips for Using Moving Averages

For beginners looking to use moving averages in cryptocurrency trading, consider the following tips:

Start With a Demo Account: Practise using moving averages in a risk-free environment to understand how they work and how to interpret their signals.

Avoid Over-Reliance on a Single Indicator: While moving averages are valuable tools, they should not be used in isolation. Combine them with other indicators and analysis methods for a more comprehensive approach.

Continuous Learning: The cryptocurrency market is constantly evolving, so it’s important to stay updated with market trends, news, and advancements in technical analysis to refine trading strategies.

Conclusion

Moving averages are powerful tools in cryptocurrency trading, offering simplicity and effectiveness in identifying trends and potential trading opportunities. By understanding the different types of moving averages, how to apply them, and incorporating them into comprehensive trading strategies, traders can enhance their decision-making process. 

However, it’s essential to be aware of their limitations and to use them in conjunction with other indicators and risk management practices. As the cryptocurrency market continues to grow and evolve, staying informed and adaptable will be key to long-term success in trading.

Due Diligence and Do Your Own Research

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, cybersecurity, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.

Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.