[ Crypto Trading with Moving Average ]-Steemit Crypto Academy | S6W2 | Homework Post for @shemul21
1.) Explain Your Understanding of Moving Average.
In Simple words Moving Average in Trading is a line that has the Average price value over a period of time. In the Moving Average we calculate the Average price of candles and this average price becomes a line that denotes the average price movement of the Asset in a given period of time. Moving Averages provides Dynamic Support & Resistance to the price in the market.
The value of the Moving Average Depends upon the number of candles and their price. It has mainly 3 types-
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a) Simple Moving Average or Moving Average
b) Exponential Moving Average
c) Weighted Moving Average
Let's set up the Moving average on the Chart-
Step-1: Open the Chart of any Asset
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Step-2: Click on Indicator Section and Type- Moving average and click on it.
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Step-3: The by default moving average is 9 periods however we can change it as per our need.
We generally calculate the Moving Average from candles closing price. Now we can calculate the Moving Average on any length for example 5 days, 12 days, 20 days. Let's suppose if we want to calculate the Moving Average value of length 5-
Here is the closing price of the last 5 days (1,2,3,4,5) So the Simple Moving Average value will be
SMA= (1+2+3+4+5)/5= 3
3 will be the value of SMA on the 6th candle.
Note: In this calculation we have taken the closing price of the candle however there are other options available as well like High, Low, Open, etc.
2.) What Are The Different Types of Moving Average? Differentiate Between Them.
Moving Averages are mainly 3 types-
a) Simple Moving Average or Moving Average (MA)
This is the most commonly used Moving Average in the world of trading and it helps us to identify the trend of the Market. Moving Average provides good Dynamic Support and Resistance in the market and those are the places where we can plan our trades. The simple moving average is calculated with the Price of Specified Candles like 5-200 candles. The value of MA is being calculated on the Closing price mostly however we can also calculate its value from High Price, Low Price, Open price of the Candles.
Here is the closing price of the last 5 days (1,2,3,4,5) So the Simple Moving Average value will be
SMA= (1+2+3+4+5)/5= 3
This 3 will be the MA value.
b) Exponential Moving Average (EMA):
Exponential Moving average is almost similar to Moving everhoweer but at the time of the Calculation it gives weighted to the Most Recent Price changes and are calculated by applying a percentage of Most Recent Closing price to yesterday's moving average. EMA is the world's second most used Indicator.
Exponetial Moving average is fast and stay closer to the Price as compare to Simple Moving Average as we can see in the below Chart-
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Blue Line is SMA and Black Line is EMA.
Observation:-
As we can see in the chart the EMA is following price more closely as compare to MA and this happens becaue EMA gives priority to the most Recent Data.
Exponential Percentage = 2/ Time Period+1
50 Days EMA = 3.9% exponential Average (0.039= 2/50+1)
This means the most recent day will weighted 3.9% of the value of EMA where in caes of 50 Day moving average the weighted will be 2%. Equal for all the data.
c) Weighted Moving Average (WMA):
Weighted Moving Average focuses on the Recent prices that older one. Each periods data is multiplied by by a weight, with the weighting determine by the number of periods selected. Here is the formula to calculate Weighated Moving Average.
WMA= {Price*n + Price(1)*n- 1 + .... Price(n-1)*1}/{n*(n+1)/2}
Where, n= Time period
- WMA is more sensitivie as compare to EMA & SMA and can idenfity the trend sooner than SMA. Let's apply these 3 moving averages on the single chart.
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Observation: We can clearly see that WMA is very close to the Price as compare to EMA & SMA. This is how it gives trend reversal signals faster than any other moving average.
3.) Identify Entry and Exit Points Using Moving Average. (Demonstrate with Screenshots)
In order to identify the Trdes opportunity using Moving average we need to a Strategy, Professor discussed about using 50 EMA and 200 EMA and I thought why not to explore this little bit more. I explored and observered it gives pretty good enteries on 1 hr timeframe.
Strategy Requirement-
a) 50 EMA
b) 200 EMA
Rules-
a) Only Enter on the Pullback
b) We can take up to 3 trades after the crossover happen. the very first pullback trade has the very good chances of winning.
c) We need to wait for the Green Candle in case of Buying near 20 MA and Red candle in cae of Selling Near 20 MA pullback.
Buy Trade-
50 EMA should cross 200 EMA from the down then we will wait for the Pullback and always take entry near 20 EMA. One the price makes a Green Candle near 50 EMA on the high of that candle we will execute Buy Order and the Sl will be Swing low or below the Entry Candle.
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SellTrade-
50 EMA should cross 200 EMA from the upside then we will wait for the Pullback and always take entry near 20 EMA. One the price makes a Red Candle near 50 EMA on the Closing of that candle we will execute Sell Order and the Sl will be Swing High or above the Entry Candle.
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Notes:
- There is no holly grain strategy in the market that can give you 100% success rate.
- This strategy has success rate approx 60% so you can still make money using this strategy if your Risk reward is good. I would strongly suggest you to go with 1:1.5 RR.
- Your Accuracy will increase along with your experience with the setup.
4.) What do you understand by Crossover? Explain in Your Own Words.
Crossover in Trading simply means when one Moving Average Crossse the second Moving Average from upside or downside is known as Crossover. Let's understand with the example-
In the above chart we can clearly see that 50 EMA crosses 200 EMA from the downside so this is Crossover. It can vice versa as well.
There are so many crossover however I would like to discuss the 2 most popular Crossovers in the trading which is Golden Cross & Death Cross.
Golden Crossover:- Whenever 50 Period Moving Average crosses 200 period mving average from downside then it is considered as Golden Crossover. This is a very bullish Sign for the market and as per the history whenever this Golden cross over happend the market tend to go up. In this golden Crossover 50 MA & 200 MA works as a great support.
In the chart we can see BTC price surges 44% after the Golden crossover.
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Death Crossover:- Whenever 50 Period Moving average crosses 200 Period Moving Average from Upside then it is considered as Death Crossover. This is a Bearish Sign for the market and it may create panic selling and price tend to go down.
We can see after the Death cross market crashes arond 25% and made bottom.
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5.) Explain The Limitations of Moving Average.
As we know there is no method which is perfect so Moving Averages also have some limitations that we will understand.
The biggest problem I have faced with the Moving Average or Moving Average Based Strategies it gives so many false signals in Sidways market. Moving Averages works really great in Trendy market however it become very difficult to take dicision based on MAs in Chopy Market or when the volatility is on its peak.
We need a lot of Historical data to predict next trend and it doesn't takes account into data outside the Average Period.
It may fail in the huge volatile market and specially in Crypto when price can fall or go up all of sudden with the news. Big players always look to hunt liqudity in the market.
Conclusion
Moving Averages are a great tool for the traders and it helps us to indentify the trend in the market. Moving Averages are a good Dyanmic Support and Resistance in the market. They do have some limitations specially in the choppy market however with the experience we can pretty much find other solution to avoid such senario. The session was full of knowldge and fun I will look forward for the next session.