What are the best crypto trading strategies using moving average? Irrespective of the type of financial market, the moving averages play a major role and are one of the most popular indicators used by most of the traders.
In the crypto market, these moving averages are used to level the price action within a specific period of time.
This time period indicates the time on the chart you are considering. For example, an hourly chart will have a moving average with a time period of 21.
This means that the moving average will smooth the price on the basis of the data available for the past 21 hours.
The moving averages usually consider the earlier price action and therefore are also considered as lagging indicators.
If you want to use the moving averages in crypto trading you must set it up precisely so that you can adjust the number of time periods you want to consider.
Moving averages can be simple or weighted and the one you should choose will depend on the trading style. Check out crypto scalping pros and cons.
Short-term traders will be benefited by using a shorter moving average and long-term investors should choose a long moving average.
Best Crypto Trading Strategies Using Moving Average
If only you have the right tools at your disposal and know how to use them, you will be able to keep up with the fast pace of the crypto market.
You will also be able to choose the right trading strategy using these tools.
Moving average is one such tool that will help you to trade well only if you know about the different types of moving average trading strategies.
Here is a list of moving average crypto trading strategies that you should follow. Choose one based on your preference, trading style, and risk profile.
Moving Average Crossover
This particular moving average crypto trading strategy typically indicates two specific moving averages. This will help you to know when exactly you should enter into and exit from a trade.
One of the two moving averages is for a shorter look-out period and the other one is for the longer time period on the chart.
Since moving averages lag, it may be difficult to pinpoint the price swings but this strategy will enable you to know the time for a crossover, if you have the patience to wait for it to happen.
When you look at the shorter period moving averages and notice that it closes above the longer period moving averages, this indicates that there is a bullish trend and you can start buying crypto coins.
This position is called the ‘Golden Cross.’ On the other hand, if the shorter moving averages fall below the longer ones, it indicates a bearish movement or a ‘Death Cross.’ It is better to sell off your crypto assets then.
Resistance and Support
This is a more dynamic strategy to follow while crypto trading using the moving averages. In this strategy you can combine different other styles of trading such as swing trading, aggressive trading or long term trading.
In this strategy the moving averages act as the resistance and support levels. This will help you to know the exact time to enter into a trade and the best time to sell your crypto coins to come out of it.
Between the support and resistance level a specific region is created and you need to react within this set region. These support and resistance lines are quite flexible and create a distinct ‘area of value.’
As a trader these lines will help you to identify the current trends and enter the market to ride on it.
When you need to know the exit positions you can combine the moving average with other useful technical directors such as Bollinger Band, Fibonacci Extension tools, and trend lines.
Multiple Moving Averages
This is a specific crypto trading strategy to follow using moving averages, and multiple of it.
This makes it easy to confirm the trend following because the price swings seem to move in one particular direction.
This helps in defining the trend and when it is done, it makes it much easier for a trader to identify the crossover and know when is the right to enter into a trade or exit from it.
In the daily chart, when you use the 20, 50, and 200 moving averages you can use the 200 moving average for price definition.
If all other moving averages have positive gradients this indicates a bullish trend.
Ideally, the 20 moving averages will cross over the 50 moving averages to indicate this bullish trend where you may enter into a trade.
If the trend is bearish or the 20 moving averages crossover is below 50 moving averages you can exit the trade.
If you are confused, here it is in simple terms. If you consider a longer time period then the slope of the moving averages will define a trend in the price movement.
If the slope of the moving average is upwards it will indicate that the crypto asset is in the uptrend.
On the other hand, if it slopes downwards, then the particular crypto asset in question is in a downtrend.
However, keep in mind that these are just an indication of the trend and no single moving average can identify the changeover from a downtrend to an uptrend or vice versa.
The main purpose of using moving averages is to filter the current trends. However, it can be used for more particular purposes.
For example, the distance between the spot price and the leading moving average signifies the potency of the momentum underlying it.
The good thing about the moving averages is that you can even adjust them to construct channels and the spot rates at the same time.
These channels are very useful to quantify the distance between the moving average and the spot price.
All these are very helpful in ranging markets and for identifying the support and resistance levels.
In short the Bollinger Bands are extremely helpful moving averages that will allow you to gauge the underlying momentum, and, in the process, get an idea of the volatility of the crypto market.
The bands play a significant role in understanding the price swings of a crypto asset.
For example, the middle band resembles the 20-period moving average. On the other hand, the outer bands are useful to determine volatility of the market.
If you wish to trade in a ranging market the prices of the crypto assets will move back and forth within the region of the Bollinger Band at the center.
If and when the prices of the crypto assets recover, it will be touching the upper and lower bands.
Or, it may even be closing above or below the two outer bands. All these indicate a price reversal that is about to happen.
The most significant benefit of using Bollinger Bands for crypto trading is that you can create and use a strategy that will spot and sort a ranging market or that which has a solid momentum.
Types of Moving Averages in Crypto Trading
Moving Average or MA in crypto is an indicator. It finds the median of the historical prices and indicates it with a line on the primary chart. Ideally, there are four different types of moving averages described as under:
- SMA or Simple Moving Average – This moving average shows the closing price points of a crypto asset within a particular time frame. The automated process uses a specific formula which is: SMA = SUM (CLOSE (i), N) / N. here, CLOSE is the close price of the present period and N denotes the number of calculation periods.
- EMA or Exponential Moving Average – This is a moving average where a specific share of a present closing price is added to the earlier value which indicates the latest price of a cryptocurrency with added weight. The formula used is: EMA = (CLOSE (i) * P) + (EMA (i – 1) * (1 – P)). While other things are the same, EMA (i – 1) indicates the prior value and P denotes the percentage of the price value used.
- SMMA or Smoothed Moving Average – This is a special type of technical indicator that shows the moving averages of several values. These are the values within a specific time period, that including the current bar and that excluding the current bar reading. The formula used here is: SMMA (i) = (SMMA (i – 1) * (N – 1) + CLOSE (i)) / N. Here SUM1 is that of the preceding bar, PREVSUM is the smoothed sum of the same, SMMA (i-1) is the smoothed moving average, SMMA (i) is the smoothed moving average of the present bar but not that of the first one, and N denotes the smoothing period.
- LWMA or Linear Weighted Moving Average – This technical indicator shows the recent values that hold more weight than the earlier readings. The weight is obtained by multiplying all closing prices of the series by a fixed weight coefficient. The formula used here is: LWMA = SUM (CLOSE (i) * i, N) / SUM (i, N) where SUM (i, N) is the total of the weight coefficients and N denotes the smoothing period.
You can set up one of these moving averages according to your need and preference to get the best price indications.
Best Settings of Moving Averages to Follow for Crypto Traders
While using moving averages, just like all other traders, you will also have to make the best settings to make the best use of this effective tool.
For this you will need to do some refinements in your knowledge first. You must know things like what the best period settings are and how to set them precisely so that you get the right signals within the desired time frame.
To set the moving averages precisely, first you have to know what type of a crypto trader you are.
You may be a day trader who holds opening and closing positions only for a few hours or you may be a swing trader who opens a position but holds the coins for a couple of days.
The next thing to know is the actual purpose that you want to use the moving averages for crypto trading.
These will drive you as well as your strategy and make the moving averages work just the way you want.
Then set the moving averages in such a way so that the price actions ‘respects’ it.
You can do this by using the simplest moving averages of all but make sure it is widely used by most of the traders. Following the crowd is the best principle in this respect.
Next, you should look for the common periods that most of the crypto traders use. This will largely depend on the type of trader you are.
For example, if you are a day trader, you will be better off in knowing the unexpected movements in the price if you use a 9 or 10-period moving averages.
On the other hand, if you are a swing trader you should use a 21-period moving average so that you can look back and utilize the 4-hour or higher charts in the best possible way.
And, if you are a long-term trader, you will need to use the 50, 100, 200, 250 period moving averages so that you can easily see the reactions of the price action.
The best way to set up moving averages is to follow the trends because these are primarily trend following indicators that will indicate the general direction of immediate, median or long term price movements.
However, consider your trading style along with your risk tolerance because the trend will depend on it mostly.
Another way to set the moving average is fixing at the center when the price swings between support and resistance.
This will help you to make the most of the riding profits from the clearly defined market as long as possible.
If you want to be inventive during crypto trading, use moving averages. It will enable you to identify the inflection points. In spite of being lagging indicators, these master tools will help you to pick up and follow the latest trading trends.