How to Use Moving Averages in Trading
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In the past, CoinMarketCap Alexandria covered a wide range of technical indicators and tools to help traders. You can check them out in our trading analysis sections. And now, it is time to cover one of the most popular indicators on TradingView, moving averages (MA).
In today’s article, we will discuss what moving averages are, and how to use them in trading. Let’s get into it!
But before that, you may wanna learn how to use TradingView.
What Are Moving Averages?
A moving average (MA) is a technical indicator that shows you the average price of a pre-set number of candles. For example, the 50-day moving average calculates the average price for the last 50 daily candles. To do this, the closing price of each candle is used.
The chart below shows the 50-day moving average on Bitcoin’s daily chart. As you can see, it shows the overall direction of the market in a simplified manner. The chart does this with a slight delay, as the moving average follows the movement of the price. Therefore, it only slopes down when the price starts to fall. This so-called lag should always be kept in mind! Lower timeframe charts can be used to minimize lag.
Why Should We Use Moving Averages?
As discussed earlier, moving averages paint the overall direction of a trend. When the chart is trending down, shorting is generally preferred over longing.
In uptrends, moving averages are sloped upwards, and the price is generally trading above the MA. Short-term MAs, such as the 15-day average, are above the long-term averages, such as the 50-day averages.
The more the price gets away from the moving average, the stronger the trend is. However, this situation can also be taken as a warning sign because the price often returns to the mean. In downtrends, the price trades below the MAs. In this scenario, short-term MAs go below the long-term averages.
The chart shows the last year’s Bitcoin price action and its 50-day moving average. It illustrates the function of moving averages well and shows how to prices return to the average line. The grey-circled areas are examples where the price attempted to flip the trend and failed. These failures often result in trend acceleration.
Can I Use Multiple Moving Averages?
Using multiple moving averages can help you spot the transition between uptrends and downtrends in advance. In these transitional periods, long-term moving averages flatline, while short-term moving averages cross the long-term ones. These crosses are usually referred to as the golden cross and the death cross.
Check out our our detailed guide on death cross and golden cross!
How Can I Use Moving Averages in Trading?
There are many ways to use moving averages in trading. The first method views moving averages as a kind of dynamic support or resistance level. In this strategy, traders seek to buy or sell retests of the moving average after it is broken.
Ideally, the moving average lines up with a horizontal level, as seen in the chart below. Confluence is not required, but often it increases the likelihood of the level acting as support. Traders can seek to exit these trades when the price reaches other moving averages or another horizontal level.
The chart below is an example of exiting a trade using a moving average, where a trader took a long position after the SFP (more on that topic here), and took profits as the price rallied into the moving average. Again, the confluence with a horizontal level adds confidence to the trade.
Conclusion
All in all, a moving average is a great indicator to create a better understanding of trends. It can help you optimize your trades. As a final note, it is unwise to blindly jump in when the price reaches a moving average. Your best bet is to look at how it behaves once it gets there, and then decide whether to take the trade. For example, wicks through a moving average can tell you the level is being respected.
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