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Best Moving Average Trading Strategies for Cryptocurrencies

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Best Moving Average Strategies for Crypto

Crypto streets are too fast-paced AND pretty lucrative if you are armed with the right trading tools.

As such, learning various crypto trading strategies like using moving averages and other technical indicators can help keep you on the right side of trades.

The good news: all of these crypto trading strategies are universal.

Here, we mean learning how to use moving average crossover strategies applies to Forex, Stock, Crypto, and every other tradable market.

Questions you might be asking yourself are these: If we are talking about moving average crossover strategies, what exactly is this “moving average”?

In fact, what the heck is this tool? And why are people “stressing” Google’s systems by searching for this crypto trading strategy?

To get going, we must understand the basics of what pins this indicator. This will mean going back to the basics and “peeling back the mask.”

We must grasp all the details of what is arguably the world’s most used trading tool employed by millions of beginner and experienced crypto traders.

What is a Moving Average (MA)?

A moving average in cryptocurrency trading is just what the name implies—a moving average. This indicator averages out historical prices and prints out as a line on the primary chart.

Here is what it does: Deploying a simple moving average on a chart will activate a formula that automatically fetches price points of an asset within a period and prints out the line.

It is important to note that a typical candlestick has four price points.

Let’s take, for example, the daily chart.

On any given day, the price will open at a price “a,” retraces to register a low at “b,” before rising to point “c” and closing at a price “d.” All these are critical and can be employed differently by a trader depending on his style.

Types of Moving Averages in Cryptocurrency Trading

There are four main types of moving averages:

Simple Moving Average: This averages the close price point of a digital asset within a given period.

The process is automated, and the formula is as below:

SMA = SUM (CLOSE (i), N) / N

Where:

SUM — sum;

CLOSE (i) — current period close price;

N — number of calculation periods.

Exponential Moving Average (EMA): It is a “smoothed” moving average, calculated by adding a particular share of the current closing price to the previous value. The result means that the latest price of a crypto asset would carry more weight.

The formula is as below:

EMA = (CLOSE (i) * P) + (EMA (i – 1) * (1 – P))

Where:

CLOSE (i) — current period close price;

EMA (i – 1) — the value of the Moving Average of a preceding period;

P — the percentage of using the price value.

Smoothed Moving Average (SMMA): This technical indicator comprises several moving average values. The first value, for instance, is the moving average value within a given period. Other values taken into consideration are the moving average inclusive of the current bar and that which excludes the reading of the current bar.

The formula is: SMMA (i) = (SMMA (i – 1) * (N – 1) + CLOSE (i)) / N

Where;

SUM — sum;

SUM1 — the total sum of closing prices for N periods; it is counted from the previous bar;

PREVSUM — smoothed sum of the previous bar;

SMMA (i-1) — smoothed moving average of the previous bar;

SMMA (i) — smoothed moving average of the current bar (except for the first one);

CLOSE (i) — current close price;

N — smoothing period.

Linear Weighted Moving Average (LWMA): It is a moving average where the recent value holds more weight than previous readings. This weighting is calculated by “multiplying each of the closing prices within the considered series, by a certain weight coefficient.”

The formula is as below:

LWMA = SUM (CLOSE (i) * i, N) / SUM (i, N)

Where;

SUM — sum;

CLOSE (i) — current close price;

SUM (i, N) — total sum of weight coefficients;

N — smoothing period.

You can learn more about these moving average indicators here:

Best Moving Average Settings for Crypto Traders

However, the refinement doesn’t end here. Yes, you might know what moving averages are but what are the best “period” settings? Which time frame will give good signals?

We must first answer these questions:

First, what kind of a crypto trader are you? Are you a day trader—only opening and closing positions for but a few hours, or a swing trader—who opens and holds trades for a given period—a day or two?

Second, you should clearly define your purpose of using moving averages in the first place. What drove you here?

Moving averages do “work” most of the time. Many traders use them—so it becomes a self-fulfilling prophecy in the sense that price action tends to “respect” moving averages. But here is the caveat: You have to use the simplest and the most adopted moving average used by most traders. Here, try going with the crowd since simplicity will thrive over needless complexities.

Cycling back to how traders should set out their period settings, it has emerged that the following “periods” are common among traders.

Day traders, keen on acting on sudden price movements, use the nine or 10-period moving averages. Swing traders—utilizing the 4HR chart and higher– prefer the 21-period look-back. Long-term traders watch how price action reacts when using the 50, 100, 200/250 period moving averages.

Moving Averages are “Trend Following”

Over and above everything, moving averages are trend-following indicators.

By this, we mean the moving average indicator can easily pick out the primary trend regardless of its type. The formula employed by each only helps in sensitivity, nothing more.

For clarity, a “trend” is a general direction of price in the immediate, medium, or long term.

Depending on the risk profile of a trader and trading style, the duration of this “trend” can take hours, days, or sometimes months—even years.

Mostly, this depends on the time frame used. Lower time frames have more trends, but most are short-term—only lasting minutes or hours. The longer the look-up period—that is, 50/100/200/250—the better the moving average can work as dynamic support or resistance.

This, therefore, means a trader can quickly determine where to place stops after entering trades. These moving averages work best in canceling out “trade noise” and other premature signals like fake breakouts and traps.

But here is what you should know beforehand: You may find yourself hoping from between different moving average types, periods, and so forth. As guidance, it doesn’t matter. There is no certified moving average that will always print out winners. However, you can be on the winning path if you align your moving average trading strategy with your trading approach. These two don’t have to clash!

Using a moving average can quickly help a trader determine when crypto prices are trending higher or reversing and when the trend is about to change.

Remember, the “crypto”—or any other market in this regard, is like a rubber band. If overstretched, it will snap back—along with casualties along the way.

The market only trends about 30 percent of the time.

The remainder is captured by a consolidating, choppy price action where traders can lose a lot of money. Remember that moving averages don’t work in a ranging market.

Whenever prices oscillate between a defined resistance and support, the moving average is almost always fixed somehow at the center. Therefore, it is tough for a trader to identify the primary trend, subsequently canceling the technical indicator’s validity.

Therefore, it is vital to take advantage of clearly defined markets, riding profits for as long as possible.

Using a moving average can identify the trend, when to get in, and most importantly when to exit.

But, how do I get in and out, you ask? Where can I buy low and sell higher?

Don’t fret.

Moving Average (MA) Crypto Trading Strategies

Crypto trading is dense with valuable tools, and this is where we’ll learn and understand several moving average trading strategies.

So, what are these “crypto trading strategies” we keep talking about?

Many moving average crypto trading strategies depend on traders’ preferences, risk profiles, and trading styles.

The below are the common moving average trading strategies for cryptocurrencies:

Moving Average Crossover

50 moving average cross 200 moving average bitcoin

Golden cross, Bitcoin chart

This is a moving average strategy for trading cryptocurrencies that employs two moving averages. It is used to identify when to get in and out of a trade. Since moving averages lag, a trader might not pin-point exact inflection points but would strip out a big chunk of the trend.

A crypto trader plops two moving averages on the chart—one with a short period and the other with a longer look-out period. Say 21 and 50 moving averages, or 50 and 200 moving averages, and wait for a cross over.

If the shorter period moving average closes over the longer period moving average, it could signal that the trend is bullish, and traders can begin buying. If the 50 MA closes to the upside above the 200 MA, it forms a “Golden Cross.” If the 50 MA falls below the 200 MA, it creates a “Death Cross.”

On the other hand, if the crossover is the other way round, it means the trend is reversing, and it is time for traders to “fade” and sell.

Dynamic Resistance and Support Trading Strategy

This strategy combines best with other trading styles—aggressive, swing, or long-term trading. Aforementioned, moving averages can act as dynamic support and resistance levels.

By reacting within a set region around the flexible resistance or support line—the “area of value” a trader can find entries to ride the trend and in combination with other indicators like the Fibonacci extension tools, trend lines, or even the Bollinger Band, to exit positions.

This strategy is best explained here:

Multiple Moving Averages (Guppy MAs)

In this strategy, a trader uses multiple moving averages for confirmation. As aforementioned, moving averages are trend following.

Therefore, when all move in the same direction, the trend is defined. Once defined, a trader can enter or exit trades when there is a crossover.

For instance, if a trader uses the 20, 50, and 200 moving averages in the daily chart, the 200 MA can be used for price definition. If positive sloping and other MAs have positive gradients, the trend is bullish.

To enter a trade, he/she will wait for a crossover—that is, the 20 MA cross above the 50 MA in a “bullish” trend. If the opposite happens, the trade exit.

Moving Average Envelopes and Bollinger Bands

Moving averages are used to filter trends. The distance between the leading Moving Average and spot price indicates the strength of the underlying momentum.

Moving averages can be adjusted to create channels along with spot rates. They help quantify the distance between price and MA. For this, they are instrumental in ranging markets and when marking out resistance and support levels.

Bollinger Bands best exemplify how helpful moving averages are in gauging momentum—and thus volatility, in the crypto market.

The middle band is the 20-period moving average, while the outer bands gauge volatility. In a ranging market, crypto-asset prices will oscillate around the middle Bollinger Bands. However, if prices recover, touching—or even closing above/below the upper or lower Band, it could signal an imminent reversal.

A trader can use this strategy to filter out markets with solid momentum or a ranging market and is an excellent addition to plain moving averages.

Bollinger-Bands-crypto

Conclusion

Traders have to be inventive when trading. After all, it is more of an art than science since patterns and strategies often won’t work as anticipated.

Moving averages are popular, but they are lagging indicators. As mentioned earlier, they are not precise, especially when a trader wants to pick out inflection points. However, they are master tools for picking out trends. Employing the above strategies can help secure profits. For best results, this indicator can be used in combination with others for more precise entries.

Crypto is new and technical indicators—including moving averages, might, sometimes, not make sense. The sentimental, FOMO aspect may thrash set-ups, causing considerable loss. Therefore, employ the right risk-management strategies, and when “riding trends,” use a trailing stop loss.

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