They’re one of the most commonly used trading indicators. But how can you use them to get ahead?
Bitcoin’s price moves up and down, often fluctuating wildly in any given trading period. Moving averages smooth out those ups-and-downs, giving traders a broader picture of what the market is doing.
For example, You might take a 100-day moving average. This is the average of the closing price (i.e. the price at midnight) for each of the preceding 100 days. You can plot the 100 MA line on the same chart as bitcoin’s price, and compare where the price is against that average every day.
Or you might take a shorter MA, like a 50-period MA on the 4-hour chart. The idea is the same. The MA screens out the ‘noise’ and give a sense of where the price is compared to where it has been in the recent past.
Why are they important?
Moving averages are used in trading to give a sense of where the market is going overall – the trend. That might be the short-term trend – maybe on a scale of hours or even minutes – or the long-term trend, on a timeframe of many weeks or months.
For example, you may have heard that the 200 daily moving average is an important indicator on a long-term timeframe. It averages the price over the last 200 days, so that line on the chart gives a good sense of how the market is trending overall. When the price moves above the 200 DMA, it’s generally taken as a bullish signal: it means that price has broken above its long-term average.
Many traders take two moving average lines and wait until they cross to make a trade. 50 and 200 DMAs are a classic one (a ‘golden cross’ or ‘death cross’, depending on which way they cross). When the 50 DMA crosses up over the 200 DMA, it shows that recent market sentiment is more positive than longer-term sentiment.
Traders use the same approach on all timeframes. So which MAs should you use? Well, that depends on your timeframe. There are no wrong answers here, though it would be odd to use the 100-week MA and the 50-hour MA, for example. 200 and 50 daily moving averages are a classic one for longer-term traders looking to understand the trend. On a shorter timescale, you might like to check out the 30 and 13 MA on the 4h chart. The best thing to do is to figure out your own timeframe – whether you want to make trades on a short-term or long-term basis – and Google around for a few prominent (and successful) traders to see what approach they take.
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