What is a moving average (MA)? All you need to know

Main

• Moving Average (MA) in technical analysis is an indicator based on the average price value for a selected period of time. MA refers to trend indicators, smoothing out volatility and helping to determine price direction.
• The MA indicator is applied not only to price, but also to any other data, including trading volume, values ​​of other indicators, statistics, currencies, commodities and other instruments.
• When analyzing the cryptocurrency market, 50-day and 200-day moving average indicators are often used.

What are moving averages?

MA is one of the easiest to use and therefore popular indicators for technical analysis. Depending on the goals and trading strategy, different types of moving averages are used:

1. Simple Moving Average (SMA) is calculated as the arithmetic average of individual periods (minutes, hours, days, and so on) for a selected period of time. For example, to calculate the 100-SMA on an hourly chart, the indicator takes the price of each individual hour, sums the previous 100 values, and divides by 100. For a 20-SMA, it sums the previous 20 values ​​and divides by 20.
2. Exponential Moving Average (EMA) is more sensitive to price changes. It is calculated like the SMA but prioritizes near data periods over those in the tail of the period. EMAs are used to estimate the front of the curve by prioritizing fresh data.
3. The Smoothed Moving Average (SMMA) “gives” more weight to the data at the tail of the calculation period and much less weight to near values. Due to this, the SMMA indicator is not as sensitive to momentum and flattens the front of the curve, paying more attention to the overall trend.
4. The Linear Weighted Moving Average (LWMA) primarily takes into account fresh period values ​​and reduces the importance of the data linearly towards the tail. LWMA is more sensitive to fresh data than EMA.

How to use a moving average?

All moving averages have their own arguments and are adjusted individually depending on the trading strategy, time period, instruments and other conditions. Having equal adjustment periods, each moving average will behave differently.

As shown in the figure, the SMA, EMA and SMMA have the same length of 200 days but behave differently.

In addition to determining the overall trend, traders use the MA indicator to calculate possible support and resistance levels. The crossover of the moving averages can also signal the strength or continuation of the trend.

For example, finding the price below the 200-day moving average can signal a strong bearish trend. In the example with the price being below the 50-day moving average, there is a short-term downtrend. When the price of an asset is above the 200-day moving average and at the same time above the 50-day one, this is a strong bullish trend.

What MAs are used in the cryptocurrency market?

For determining long-term trends, the most common periods are 50, 100, 150, 200 and 250 days. For short-term movements – intervals of 5, 10, 20 and 50 days.

The establishment of periods is related to the number of trading days on the exchange, excluding weekends and holidays. Thus, in the example with a 50-day moving average, we are talking about ten exchange weeks, and with a 200-day MA, about 40 weeks. The smallest period of 5 days means one week of the exchange.

Despite the fact that there are no days off and holidays on the crypto market, tools from the traditional financial market were adopted to analyze the prices of digital assets. For this reason, when trading cryptocurrencies, the same periods are used: 50, 100, 150, 200 and 250 days.

The most used indicators in the cryptocurrency market are considered to be 50- and 200-day moving averages.

What is the golden cross and the cross of death?

Among traders, the Golden Cross and Death Cross patterns are often mentioned – one of the most common moving average crossover patterns.

A golden cross is a situation when the short-term (50-day) moving average crosses up the long-term (200-day) moving average, which is considered to be a bullish pattern.

In turn, the death cross is a bearish pattern, suggesting the intersection of the short-term (50-day) moving average below the long-term moving (200-day) average.

The wide distribution and popularity of the above patterns do not give any guarantee of success – it is worth assessing the risks and prospects only in conjunction with many other factors.

What are the advantages and disadvantages of a moving average?

On the one hand, all MAs make it much easier to identify short-term and long-term trends. Smoothing the price volatility of an asset makes it easy to see the direction of the instrument’s price movement.

Other advantages of using moving averages are the ease of setup and use, plus the visibility of the displayed data.

But, like any other indicator, MA has its drawbacks:

• belated character. Moving averages are always late in rising and falling – in case of sharp movements, the difference with the current price can be very significant. As long as the moving average starts to react to changes, the trend can turn in the opposite direction.
• Only trend. When moving sideways, the moving average can only confuse and will not show any definite direction of price movement.
• False Signals. High volatility in the market leads to many false buy or sell signals. Finding the price above or below the MA does not guarantee that the market will behave in the same way in the future.