Crypto Trading With Moving Average/Crypto Academy ||s6w2||~Homework post for prof @shemul21
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1. Understanding of Moving Average
A moving average indicator is an indicator that calculates the averages of distinct subsets of the complete data set. A moving average (MA) is a crypto technical indicator that is widely used in technical analysis in crypto trading to determine a stock's moving average. The goal of a moving average is to smooth out price data by providing an average price that is constantly updated.
Traders in the crypto market can utilize the moving averages indicators which are based on special mathematical computations/formulas to establish support and resistance points in a crypto market, smooth out price (in essence filter market noise), as well as foretell the potential movement of the market.
2. Different Types of Moving Average
Moving averages could be determined in different ways with the ramification of the existence of the different forms of moving averages. Based on how these different moving averages (MA) are calculated, they express varying levels of sensitivity in the market. Here are the three common MAs:
- Simple Moving Average - SMA
- Exponential Moving Average - EMA
- Weighted Moving Average - WMA
- Simple moving average: As the name implies, a simple moving average (SMA) takes into consideration a simple data set as well as basic mathematical procedures. It's determined by multiplying recent prices by the number of periods in the computation average. One thing unique about SMA is the application of an equal amount of importance and weight to all available data thus providing a long-term view of the market situation. The simple moving average would take the most recent prices into account when determining future prices, allowing traders to make better trading decisions.
- Exponential Moving Average: An exponential moving average (EMA) is a sort of moving average (MA) that gives the most recent data points more weight and relevance, as opposed to a simple moving average (SMA), which considers all observations during a time. A moving average that is exponentially weighted reacts more strongly to recent price fluctuations. This technical indicator, like other moving averages, is used to generate buy and sell signals based on crosses and divergences from the historical average. Crypto traders frequently employ a variety of EMA durations based on their level of expertise and experience, some of which include the 50-day, and 200-day moving averages.
- Weighted Moving Average: A weighted moving average is a moving average indicator that gives recent data greater weight than previous data. By assigning linearly weighted values to guarantee the most recent prices have a bigger influence on the average than earlier prices, a Weighted Moving Average (WMA) places greater emphasis on current data than an Exponential Moving Average (EMA). This sort of MA is more data-driven than the SMA and as a result is usually closer to candles in a chart. It produces a signal by putting more emphasis on current Price Action and less emphasis on historical data. We can easily eliminate programmed pumps and dumps in the market with this indicator.
How the MAs Differ
| Criteria | SMA | EMA | WMA |
|---|---|---|---|
| Emphasis | Average daily price over a specified period | Recent price of an asset | Weighted recent price averages of an asset |
| Usefulness | Longterm trading & HODLing | Short-term trading | Spot trading |
| Calculation | Average price overtime | Current/today's price | More complicated calculation as recent prices are first weighted before averages are taken |
| Period | Best with higher time periods | Best with lower time periods | Could make do of any time period |
| Sensitivity level | Lowest sensitivity in displaying trend | High sensitivity in displaying trend | Highest sensitivity in displaying trends |
3. Entry and Exit Points Using Moving Average
- To begin, we will be adding the EMA and SMA to our trading chart. Remember, the SMA thrives with more data points so we will be using 100 period for SMA (blue) and 20 for EMA (orange). See chart below:
- Next, establish a trend. It is a bullish trend if price is above these indicators and bearish if price candles are formed with this indicators above them.
- After establishing the trend, take the most logical trading position as shown in the chart below. For a downtrend, take a trade from the top of the downtrend and take profit from beneath it. For an uptrend, take trade from the start of the uptrend and exit/take profit from its end.
4. Meaning of Crossover
Crossover in its basic term, refers to a point where two Moving Averages indicators converge or intercept each other. However, a crossover is quite significant during trading.
The significance of a crossover is this: Expect a trend reversal. It is important to note that the appearance of a crossover does not predict the future direction of the traded asset, but highlights the change in trend. MA crossover is more significant when two moving averages of different length has been applied to the chart, usually a short and long MA. Since the short MA will calculate faster than the long MA, it is usually ahead. When a faster moving average (one with a shorter period) crosses a slower moving average, it is known as crossover (i.e. a longer period moving average).This meeting point is utilized in crypto trading to either enter (buy or sell) or leave (sell or purchase) the market.
To illustrate, I have applied an MA 100 (blue) and MA 50 (yellow) to the asset chart below:
This crossover is known as a golden crossover. A type of crossover in which the shorter MA crosses and goes over the longer MA, and ensues an uptrend.
Sometimes, the revers is the case as shown below:
The crossover above is the death cross which results in the formation of a downtrend, in this case the longer MA crosses over the shorter MA.
5. Limitations of Moving Averages
There is actually no Technical indicator that is totally accurate, Moving average inclusive. Here are some of the limitations associated with Moving averages.
- It is a lagging indicator as such it tends to give false signal.
- It deals on past historical data of prices and most times history don repeat itself
- It only works perfectly in a sideway market and not trending market
- It is selective when it comes to period and time frames, using them wrongly will lead to a wrong trade.
Conclusion
Moving averages are a type of indicator that aids in determining a crypto asset's trend. They are simple to use and function on fundamental mathematical and visual principles, and they may be used in conjunction with price action for price action traders. While they have a lot going for them, these indicators are not without flaws, so traders should be cautious. Trading with this indication will generate results if it is used properly, supported by strong information and competence, as well as sound trading mentality.
Cc;
@shemul21
