How to use Moving Average indicator for Crypto Trading?
Moving Average is one of the most used indicator in trading for technical analysis. When you enter the world of trading, it is important to pick up the skill and knowledge to use indicators like Moving Average to help with your trading strategy decisions.
What is Moving Average?
Moving Average (MA) is the average price for a security or an asset in a specified period.
Moving Average is a very useful tool as it helps traders to make simple technical analysis without an overflowing of information, identify trend direction in a smooth trendline and identify support and resistance levels more accurately.
There are two types of Moving Averages:
- Simple Moving Average (SMA)
- Exponential Moving Average (EMA). This type of Moving Average has more weight to the recent prices so that it makes it more responsive to the latest data and information.
How to Use Moving Average?
In a Trading View Chart, you will notice that the indicator will be presented as the following: MA(#). The number in the bracket will indicate the time period for that respective MA trendline. You are able to add more than one MA trendline in your chart with different period.
The most common periods used are:
- MA(50) which means the indicator is using a 50-day period. Shorter period means the trendline is more sensitive to the price changes. This is more suitable for short-term traders like Day Trading.
- MA(200) which means the indicator is using a 200-day period. Longer period means that the trendline has greater lag between the data points and is more suiter for long-term investors such as Futures/Derivatives traders.
Moving Averages can help traders to understand the market better. Here are some examples of how that works:
1. MA trendline is smoother and helps traders to spot the support and resistance levels.
2. When price line crosses BELOW the MA indicator line, this suggests that the market is going bearish and the price of the action will more likely decline further.
3. When the price cross ABOVE the MA, this suggests that the market is bullish and the price will more likely incline further.
4. Using two MA indicators can be very effective as well. In the visual below, there are two MA lines, a short term (MA(50)) and a long term (MA(200)) indicator.
When MA(50) is above the MA(200), the traders can expect a bullish trend and initiate a long position in their trading strategy.
When MA(200) is above the MA(50), the market is expected to be bearish and traders can anticipate for a short position in their trading strategy.
The reason for this is because the short period MA is more sensitive to recent data. Hence, it gives traders a clearer understanding of what is the current market sentiment now.