A candlestick crypto chart provides a lot of detail in a small space regarding what the price of any given coin is doing at a particular time.
The level of detail can be so granular, in fact, that the overall trend is lost in the daily highs and lows. A simple yet powerful tool for estimating the momentum of a cryptocurrency’s price is the calculation of a moving average. Simple, linear-weighted and exponential moving averages give an indication of not only where a coin’s price was, but also where it is likely to be going.
Simple Moving Averages
The most basic form of moving averages is the simple moving average. This is computed by taking the closing price of a cryptocurrency or other security and averaging it over a period of time. In other words, you mark down the closing prices for, say, 30 days, add them up, and then divide by 30. This is the same calculation used to get the mean or average of any given number set.
The most common simple moving averages you’re likely to encounter in the field are the 50-, 100- and 200-day moving averages. Each calculation has a distinct purpose, although they all generally show the momentum of a given cryptocurrency’s price. The main weakness of a simple moving average is its simplicity; each data point is afforded the same weight and affects the outcome equally. This makes outliers a problem in calculating simple moving averages, as one price severely out of whack with its fellows – for whatever reason – can skew the entire line. To take it to the extreme, imagine your hypothetical price data set was collected over five days. Your closing prices on the first four days were $3, $3, $4, and $5. On the fifth day, however, the price suddenly skyrocketed to $25. The simple moving average line would be centered upon the average of $8 – putting your simple moving average price wildly out of joint.
The 50-Day Moving Average
The 50-day moving average is a short-term measure of market confidence. When actual prices (represented on a simple candle chart) are consistently above the 50-day moving average line, market confidence is high. If this short-term line crosses a longer-term line, the result is a golden cross. A golden cross generally means that a bullish breakout is imminent. It’s helpful to think of the 50-day moving average as a fear meter. Prices above the 50-day average indicate low fear in the market. Prices below it indicate that traders are nervous about the price, and a downward price shift might be in the works.
50 Day Moving Average showing BTC / USD, Image from Trading View
Interestingly, the 50-day moving average is sensitive enough to show big institutional selloffs, which often act as a canary-in-the-coal-mine for a larger selloff pattern. Short hops by actual prices south of the 50-day moving average line might actually be big institutional holders making their moves, and they should be regarded as a warning signal for bigger selloffs yet to come.
The 100-Day Moving Average
The 100-day moving average is considered a medium-term momentum indicator, as opposed to the short-term 50-day moving average and the 200-day moving average. It is primarily computed to examine intermediate market trends.
Intermediate trends are a subset of the primary trends captured by a 50-day moving average. They are characterized by sharp changes or reversals, and they tend to hinge on big economic or political movements. Basically, an intermediate trend can be expected to move opposite of the primary trend indicated by the 50-day moving average.
100 Day Moving Average showing BTC / USD, Image from Trading View
Bull and bear cycles alike typically go through at least three intermediate cycles, ranging in length from two weeks to 12 weeks. Just like the 50-day moving averages, prices generally display positive momentum above the 100-day moving trend line and negative momentum below it.
The 200-Day Moving Average
The final common simple moving average tracks the average closing prices over 200 days. This is an important gauge of long-term trends. A long-term trend is a “big picture” view of how a given cryptocurrency or security is doing. It’s not very useful for day-to-day trades, but it can be invaluable in spotting strategic opportunities. For instance, a 200-day moving average can’t tell you much about whether to place a buy or sell order on a day-trading basis. It can, however, advise you to pick a market entry point and hold on while the cryptocurrency or security slowly accumulates in value. By contrast, a long-term trend can tell you that it’s time to bail out of the market before it hits absolute bottom.
200 Day Moving Average showing BTC / USD, Image from Trading View
While the cryptocurrency market is notorious for its wild swings, often in daily or weekly timeframes, few would disagree that the market as a whole is in the midst of a long-term positive trend. That is, most everyone expects that the cryptomarket will gain in value over time, or display a positive long-term trend.
Linear-Weighted Moving Averages
Linear-weighted moving averages are a step up in complication from simple moving averages. That said, they are rarely used. A linear-weighted moving average addressed the equal weight problem of simple moving average by multiplying each data point in the series by its position in time with respect to the series as a whole before dividing the whole set by the number of points in the series. In a 10-day linear-weighted average, the last price in the set would be multiplied by 10. The next-to-last point is multiplied by nine and so on, until all of the multiplied numbers are eventually divided by 10. This gives greater weight and, therefore, credence to more recent prices.
Exponential Moving Averages
The exponential moving average builds upon the theory of the linear-weighted moving average and introduces an exponential multiplier, calculated via a rather complex equation. Without diving into all the mathematical details – which can be handily computed on many exchanges and with Microsoft Excel, anyway – an exponential moving average is a smoother version of the linear-weighted moving average. Like it, the exponential moving average assigns more importance to more recent prices, allowing a trader to get a better idea of where price momentum is headed.
Using Moving Averages
Moving averages provide guidelines, of a sort, for tracking where a cryptocurrency’s price will be going in short-, medium-, and long-term windows. In a very general sense, actual prices charted above a moving average are headed up, and actual prices below a moving average are headed down.
The intersections of actual prices and various kinds of moving averages yield a plethora of different common bull and bear indicators. When you run across terms like golden cross or death cross, you can be sure that actual prices have interacted in a meaningful way with one of the calculated moving averages.
Using moving averages in your technical analysis is a good starting point for determining where prices might go and when. It’s important to always double- and triple-check your results, however, using another technical analysis tool – preferably one that measures a different but complimentary metric, like volume. Moving averages tell a good story, but it’s vital that you make sure it’s the whole story.
References
- https://cryptocurrencyhaus.com/crypto-trading-how-to-use-simple-moving-averages/
- https://cryptovest.com/education/crypto-trading-tips-momentum-indicators-explained-moving-averages/
- https://www.investors.com/how-to-invest/investors-corner/50-day-moving-average/
- https://www.marketmemory.com/indicators/100-day-moving-average
- https://www.investopedia.com/articles/technical/03/060303.asp
- https://www.investopedia.com/university/dowtheory/dowtheory2.asp
- https://financial-dictionary.thefreedictionary.com/Long-Term+Trend
- https://www.investopedia.com/terms/g/goldencross.asp
- https://www.cnbc.com/2018/03/28/bitcoin-is-nearing-a-death-cross-on-the-charts-heres-what-it-means.html
