This is Season 6 Week 2 of Steemit Crypto Academy and I'm writing homework task about "Crypto Trading with Moving Average" assigned by Professor @shemul21

Moving averages are a widely used technical indicator. They are used to represent average price of an asset over a tie frame. They are graphically represented as moving lines.

The best part about moving averages is that they are simple and smoothens the price action by regularly updating the average price. The time frame can be based on traders’ choice. They can be used for reasons like identifying trend, and determining support and resistance levels.

Traders can pinpoint trading signal based on the position of the price action such as when price action moves above it can indicate the beginning of a bullish trend and an early entry for buying signal. The opposite is true when the price action crosses the MA to go below it. While many traders use them alone, they also form the basis of various other indicators such as the MACD.

They play a crucial role in reducing the noise from the price action. The direction of the moving average can give the direction of the trend and is hence easy to understand and interpret. They can also help us in identifying support and resistance zones. For example, you can see the moving average of the period 20 applied to the BTC/USDT chart below.

There are three different types of the moving averages as explained by the professor and as available in various trading platforms. these types are based on the different ways how moving averages can be constructed.

1. Simple Moving Averages
2. Exponential Moving Averages
3. Weighted Moving Averages

Simple Moving Averages

Based on the set time frame a simple moving average plots a dynamic line based on the average price of the asset in that time frame. It does so by summing up the recent closing prices and divide it by the number of periods. This average closing price average is then joined together to form a straight line.

Exponential Moving Averages

The other type of moving average the exponential moving average is a bit more complex but reacts more quickly to the price changes. these adds more calculations to provide greater depth of the market in terms of recent price changes. Traders who trade short term and need more weighted analysis use EMAs. It is also common to combine and SMA and EMA

Weighted Moving Averages

Weighted Moving Average provides even greater weight to recent price changes and is the statistical measure of the changes in the price. Its calculations involve multiplying the closing prices with a weight factor to further deepen the analysis.

Differences between the MAs

Moving averages can be used to predict entry and exit points alone and with other indicators. They act as dynamic support and resistance levels and we can take immediate positions once the price touches them. In addition to that they can also predict reversals when the price crosses them. Since they act as a dynamic support or resistance so when price crosses them it means it is a strong trend reversal.

Bullish trade signal

The market should in initially in a bearish trend and the price action should be trading below the moving average. It should then touch the MA which is acting as a resistance and cross it go above it. Though you can place the buy signal just now it is better to wait until the price corrects and go back above. Open the buy position and set the stop loss just below the MA as indicated.

Bearish trade signal

The market should in initially in a bullish trend and the price action should be trading above the moving average. It should then touch the MA which is acting as a support and cross it go below it. Though you can place the sell signal just now it is better to wait until the price corrects and go back below. Open the sell position and set the stop loss just above the MA as indicated.

When used two MAs of different period together in the chart their crossovers can help us predict the trend reversals and thus help in taking bullish and bearish trade signals. There are two types of crossovers based on if the larger MA crossed to come above the shorter or crossed it to go below it. In this case the shorter MA is said to be the faster and the larger MA is said to be the slower. The most popularly used combination is of 50 and 100.

Golden crossover

A golden crossover is when the shorter moving average crosses above the longer moving average. It is smoothen buying signal and traders should hold their position during this time. For example, in the BTC/USDT we have combined 50 and 100 period Moving averages and can see a golden cross. The crossover was followed by a sharp uptrend.

Dead crossover

A golden crossover is when the shorter moving average crosses below the longer moving average. It is a smoothen selling signal and traders should sell their position during this time. For example, in the BTC/USDT we have combined 50 and 100 period Moving averages and can see a dead cross. The crossover was followed by a sharp downtrend.

Following are some of the limitations of the moving averages.

1. As their calculation contains no variable that links the volume, buying and selling pressure it just gives us the insights of what is happening on the chart.
2. These re very simple indicators but the choice of time period is very crucial to getting the right signals and therefore setting them in the chart requires great deal of practice.
3. It cannot be used alone because in most cases its signals lag behind the price action.
4. As the recent closing prices keeps on changing so does the moving average and so does are predicted price levels.

Moving averages should be set individually based on a traders trading style. They are very simple indicator and it is easy to illustrate them with the help of the graph. There are three types of moving averages based on the criteria of the calculation and the depth of the recent price analysis.

Note :

All the Screenshots have been taken from the tradingview.com platform.
CC:
@shemul21