How to Identify Trends with Moving Average?
Life is full of ups and downs, so does the crypto market. The way you deal with ups and downs in life will make you grow, while trading the fluctuations in the crypto market will make you a richer person.
However, how to accomplish it? You need to possess the skill to identify the market trends.
Moving Average is one of the most frequently used technical indicators that help you identify the market trend direction.
What is Moving Average?
Moving average is a smooth line overlapped the price trend according to different timeframe. The most common time periods used in moving averages are 15, 20, 30, 50, 100, and 200 days. The shorter the time span used to create the average, the more sensitive it will be to price changes. The longer the time span, the less sensitive the average will be.
For short-term trading, you should choose moving average of shorter time span; for long-term trading, longer moving averages are more suitable.
Tips to Find the Trends with MA
Tip 1 The Position between Price & MA
If the price action is below the moving average, it signals the bearish trend.
When the price action is above the moving average, it indicates the bullish trend.
Tip 2 The Position between Long & Short Periods MA
If we rely solely on one moving average, we will easily be cheated by some false breakthroughs. Hence, it’s better to plot a couple of moving averages of different time span instead of just one.
For example, we have two moving averages — 10-day MA and 20-day MA. We’ve introduced that the short-term moving average responds quickly to changes in the price of the underlying, while long-term moving average reacts slower.
Therefore, if the 10-day MA is moving above the 20-day MA, it indicates the uptrend. And through the downtrend, the 10-day MA is moving below the 20-day MA.
Tip 3 Moving Average Crossover
In addition to distinguish the underlying market trend, moving average can also help us determine when a trend is about to end and reverse.
· MA crosses over the price action
During the bull, if the MA crosses over the price from up to down, it signals that uptrend may end and the bear may come, and vice versa.
· Crossover between long & short periods MA
In the bullish run, if the long-term MA crosses over the short-term one, there will come the bearish trend.
On the contrary, in the bearish trend, if the short-term MA crosses over the long-term one, it indicates the bullish reverse trend.
Tips 4 Dynamic Supports & Resistances
Moving Average line also acts as dynamic support and resistance levels. In the figure below, during the downtrend, the 10-day MA is similar to a resistance, and the price hits it and starts to drop again. Conversely, in the uptrend, Moving Average acts a support, so the price bounces up off of it.
Moving Average is such a useful tool for you to identify the trend, right? However, please keep it in mind that Moving Average is a lagging indicator formed based on past prices. Thus, it’s suggested not to make immediate trading decisions at the crossovers, but wait until the trend is clear.