What Are Moving Averages How Do They Work

Technical analysis is a major method of trading analysis used by crypto traders and investors to understand market information and make more informed trading decisions. One of the key indicators used in technical analysis is the moving average.

Understanding how moving averages work will give you a better insight into market movements. So, let’s take a quick look at how moving averages work.

What are moving averages?

Moving averages (MAs) are technical indicators that are used to track and evaluate the performance of an asset over a specific period of time. They smooth the movement of prices to get a clear picture of the market trend. MA is not only used in crypto trading; They are used in a variety of financial markets such as the stock and foreign exchange markets.

Like other trading indicators, moving averages can generate buy and sell signals. For example, a short (fast) MA crossing over a long (slow) MA is a bullish signal. On the other hand, if it crosses the bottom, traders take it as a bearish signal. Expert traders use moving averages along with other indicators to get more accurate signals and trade entry positions.

Types of Moving Averages

The two most commonly used moving averages are the simple moving average (SMA) and the exponential moving average (EMA).

Simple moving averages and exponential moving averages basically do the same thing. Both provide average price data, with the main difference being how they are calculated.

A simple moving average is a calculation of the average price of an asset, usually the closing price, over several periods. Since it analyzes closing prices, it does not react immediately to market events.

The Exponential Moving Average analyzes whether the recent price moves higher than the older ones. It is also more complex in its calculation than the simple moving average. However, you will not need to know how to calculate them as the trading platform calculates them automatically.

Whether to use SMA and EMA depends on your trading strategy. If you want to take quick decisions based on the moving average slope then EMA can be a better option. However, since it reacts quickly to price, you can enter into bad trades due to false signals. On the other hand, SMAs can be slow to provide you with trade signals, and relying solely on them can cause you to enter trends late or even miss trade entries. EMA and SMA provide better results when combined with other indicators.

How to trade with moving averages

Both short-term and long-term traders use moving averages to track market direction and trends. The most commonly used averages are the 5-day, 10-day, 20-day, 50-day, 100-day and 200-day moving averages. Traders generally focus on the five- to fifty-day MA to examine short- to medium-term market trends, while they use the 50-day MA and above to examine medium- to long-term trends. Are.

A trader who trades the longer term (higher) time frame can use MAs to examine short term trends within the higher time frame. In addition, day traders or scalpers who focus on lower time frames can use higher moving averages to examine longer term trends within lower time frames.

As a result, using the 100-day moving average period on the 15-minute time frame means that you are examining the longer-term trend in the lower time frame. On the other hand, examining the ten-period MA on the four-hour chart will reveal a shorter-term trendline on the four-hour time frame (the higher time frame).

Using Moving Average Crossover

A moving average crossover can be explained as the moment in which one moving average crosses over another. This crossing indicates a change in market trend.

Therefore, the moving average crossover could be bullish or bearish. A bullish crossover, otherwise known as a “golden cross”, occurs when the shorter-term moving average crosses above the longer-term moving average. Conversely, a bullish crossover, also known as a death cross, occurs when a shorter moving average crosses below a longer term moving average.

For example, if the 50-day EMA crosses above the 200-day EMA, it signals that the bulls have taken over the market, and traders start looking for buy signals. Conversely, a 50-day MA below the 200-day MA indicates that the bears are in control, prompting traders to look for selling opportunities.

Moving Averages as Support and Resistance

Moving averages can act as support and resistance for prices. For example, when the market price is above the moving average, it can find support there, and the MA can also act as price resistance when the price is below it.

When the price bounces off the moving averages, the trader can take action in the market using price action or other tools and indicators.

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