Using Moving Averages In Your Trading

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Beginners Guide to Trading Moving Averages for the Crypto Market

Using candlestick formations in order to determine price movement from one direction or another is great for what it does within a more confined timeframe. The problem is, the level of detail that you get from candlestick formations is so granular, that it may be hard to determine the overall trend across the daily highs and lows of a particular cryptocurrency.

This is where moving averages come into play and why they’re one of my all-time favorite trading signals for both ease-of-use and reliability.

Moving averages will really help you break down the momentum of a particular crypto coin. These averages are represented by a simple line which gives an indication as to where a coins price was and is most likely going to be, in an easy-to-see format.

Let’s start off with one of the most basic moving averages…

Simple Moving Average

This moving average, as the name implies, is a simple line that represents the closing price of a cryptocurrency, which is averaged out over a period of time.

In layman’s terms, you simply write down the closing prices for say the last 30 days, add them all up, and then divide that total by 30. This will give you the average of that particular number set.

The most common simple moving averages that you’ll read about are the 50, 100, and 200 day moving averages. Each of these three moving averages will show the momentum during their respective time period (50 days, 100 days, or 200 days).

The only weakness behind simple moving averages is its inherent simplicity, where the data points are assigned the same weight, which affects the outcome of each one equally. This means if you have a price that is severely out of range, compared to the other price points, this can skew the simple moving average line, which in turn can give you inaccurate results.

Let’s look at an example for context…

Say the first four days of price action was at $3, $4, $4, $5, and then a whopping $25. The simple moving average line would then be centered on the average of $8. As you can clearly see, this major movement in price tends to greatly disrupt the averages.

Don’t worry; I cover a strategy further down this guide utilizing the exponential moving averages alongside simple moving averages, that will help facilitate the correction of this issue.

For now, let’s discuss the 3 most common types of simple moving averages.

50 Day Moving Average

A 50 day moving average measures the short-term market confidence. This moving average is consistently used by swing traders, due to its accurate representation of the market during a 24 hour period.

When price action is above the 50 day moving average, this indicates that you’re in a short-term bull market. The opposite rings true for price action below the 50 day moving average. This would clearly indicate that you’re in a short-term bear market.

Also worth noting, when candlestick formations are moving between bullish and bearish sides of the 50 day moving average, this indicates a “ranging period” where the market is undecided where it wants to go. Trading during these ranging periods is much riskier than trading in a substantiated trend (bear or bull trend).

As you can imagine, trading alongside a trend is much more predictable than trading sideways where the market sentiment has yet to be determined.

What’s interesting about the 50 day moving average is that it’s sensitive enough to show large institutional buys or selloffs. These price movements are recorded more accurately on this shorter-term moving average.

100 Day Moving Average

This moving average is considered a medium-term momentum indicator. These are characterized by sharp changes or reversals in the market and tend to include large economic or political movements. You can expect the 100 day moving average to move opposite of the primary trend that follows the 50 day. Much like the 50 day moving average, prices above the 100 day moving average are more long term bullish and prices below this line are bearish.

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200 Day Moving Average

As you might expect, the 200 day moving average is a crucial gauge for longer-term trends. This is what you would call the “big picture” or “birdseye view” on how a particular market is doing.

This moving average is not going to tell you where to place a buy or sell order on a day or swing trading basis, however it will let you know whether you need a hold on to a cryptocurrency for a while or if you should start thinking about exiting the market.

I typically use the 50/200 SMAs cross to get an overall feel for where the market is currently and the direction it will be headed when swing trading. I cover more on this strategy below under “The CCJ Moving Average Strategy”.

The Golden Cross

The Golden Cross is defined when the line of a short-term moving average crosses a longer-term line. This cross indicates that a bullish or bearish breakout is imminent. You can look at the cross as a warning of what’s to come (think red alert).

So for example, if you have a 50 day moving average cross over a 200 day moving average, this indicates that bearish sentiment is soon approaching. The same goes for bullish sentiment. If the 50 day moving average crosses under a 200 day moving average, this indicates that bullish sentiment will soon take over.

The reason I use the 200 MA as opposed to the 100 is due to the fact that there is a much larger separation between these 2 moving averages. The 50 and 100 MAs tend to overlap one another.

It’s important to note that bearish or bullish sentiment is soon approaching once these two lines move closer together. You don’t always have to wait for a cross, but it is preferred for confirmation.

Next let’s talk about one of the most utilized moving averages for both day and swing traders alike.

The Benefits of Using Moving Averages in Forex Trading

The Benefits of Using Moving Averages – Spotting Trend Changes and Trading Signals.

Price movements of all actively traded securities are a measure of volatility and therefore take on the appearance of being very erratic.

To the untrained eye, the price chart of any given security resembles an indecipherable mess of squiggly lines with little meaning.

Even to an experienced chart analyst price fluctuations can be very misleading.

What is called for in order to eliminate these wild undulations and to enable the analyst to identify the underlying trend is a smoothing device, something to reduce the undulations and isolate the overall movement of prices.

This is the function best served by moving averages.

All averages of prices tend to fluctuate less actively than the prices from which they are derived:

The greater the number of days from which an average is composed, the more gentle and gradual are the fluctuations relative to the price action from which it is derived.

In his book, Commodity Futures Trading With Moving Averages, J.R. Maxwell provides a succinct account of the usefulness of moving averages when incorporated in a trading program:

The use of an average eliminates or reduces the distraction caused by the often sudden and relatively far-reaching daily price fluctuations, enabling the user to observe a smoother depiction of the trend changes as they occur.

This is one of the two principal reasons for the widespread use of various types of averages as trading tools.

The second principal reason is that these figures, when plotted as lines on charts, with the closing prices or other lines representing price action, will cross above and below one another as market trends change.

Two averages encompassing different numbers of price units (days) will cross over and under each other in the same fashion.

Such crossings, either by themselves or in combination with other signals, such as changes in statistical data concerning supply and demand, serve as trading signals for a large proportion of the people who speculate in the futures markets.

The Most Recommended Moving Averages Forex Trading Systems

These crossings are definite, easily observed signals in a fast-moving and frequently very confusing swirl of activity.

Clear-cut signs, such as these are, to buy and to sell, can be comforting to have under such conditions, especially when they appear to be well accepted by so many traders, and their use seems to be based upon solid logic.

The different forms of analysis involving moving averages are many and varied.

Many traders place heavy emphasis on the trading signals provided when two moving averages of the underlying security’s Priceline cross.

Others rely on a system involving a moving average or series of moving averages calculated from a moving average itself in relation to the underlying security’s price to generate trading signals.

Others still prefer to rely simply on a single moving average, which is plotted with the Priceline.

The results they obtain trading with these signals vary depending on the time frame of the averages used along with a variety of other factors.

Concludes Maxwell : “ A moving average is like any tool . It is essential to know its capabilities and its limitations before its potential value can be determined. Then, if it has any merit, the skill may be required to obtain the maximum benefit from its use.”

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For a more detailed discussion of moving average crossovers, please see The Essence of Moving Averages: What Every Successful Forex Trader Should Know.

Trading systems based on fast moving averages are quite easy to follow.

Let’s take a look at this simple system.

  • Currency pairs: ANY
  • Timeframe chart: 1 hour or 15-minute chart
  • Indicators: 10 EMA, 25 EMA, 50 EMA

Entry Rules :

When 10 EMA goes through 25 EMA and continues through 50 EMA, BUY/SELL in the direction of 10 EMA once it clearly makes it through 50 EMA.

(Just wait for the current price bar to close on the opposite side of 50 EMA. This waiting helps to avoid false signals).

Exit Rules :

  • option 1: exit when 10 EMA crosses 25 EMA again.
  • option 2: exit when 10 EMA returns and touches 50 EMA (again it is suggested to wait until the current price bar after so-called “touch” has been closed on the opposite side of 50 EMA).

Advantages :

it is easy to use, and it gives very good results when the market is trending, at big price break-outs and big price moves.

Disadvantages :

the Fast moving average indicator is a follow-up indicator or it is also called a lagging indicator, which means it does not predict future market directions, but rather reflects current situation on the market.

This characteristic makes it vulnerable: firstly, because it can change its signals anytime, secondly – because need to watch it all the time; and finally, when market trades sideways (no trend) with very little fluctuation in price it can give many false signals, so it is not suggested to use it during such periods.

Using Moving Averages

January 31, 2020 by Daniels Trading | Tips & Strategies

One the most popular and versatile tools of technical analysis is the moving average (MA). MAs are classified as “lagging” indicators, meaning that they trail the prevailing price and are studies of previously occurring price action. MAs are not intended to predict breakouts or forthcoming trends in the market. Instead, they are designed to identify or confirm an established trend in pricing.

Types of Moving Averages

Traders calculate moving averages in a myriad of different fashions, each with a varying degree of sophistication as well as a specific objective. No matter what type of MA is being constructed, its value is derived using pricing data exclusive to previous periods.

The two most commonly implemented moving averages are:

  • Simple Moving Average (SMA)
  • Exponential Moving Average (EMA)

Simple Moving Average (SMA)

The SMA is the most basic variety of moving average. You can calculate an SMA by taking a collection of price values for a desired number of periods, then dividing the chosen value by the number of periods. As the SMA moves forward in time, replace the first price value of the series with the most current value, updating the calculation.

Exponential Moving Average (EMA)

You can calculate EMA in much the same manner as the SMA, except the most recent price values are assigned greater relevance or “weight.” As a result, the EMA attempts to reduce lag by giving more validity to the most recent price action. MA calculations may be as simple as the SMA or extremely complex. In many cases, hybrid MAs are constructed from mixing elements of the SMA and EMA with more radical concepts.

Applications of Moving Averages

Always keep in mind that MAs are limited in their predictive capabilities. In contrast to technicals — such as oscillators, volume indicators, or chart patterns — MAs do not aid in identifying market reversal or the location of a potential breakout.

However, MAs do provide useful insights into market behavior. Many technical traders and investors alike incorporate the use of MAs into their trading plans for use in the following areas:

  • Trend Identification
  • Pricing Momentum
  • Support and Resistance

Trend Identification

The number one trading axiom is “the trend is your friend.” A considerable number of trading methodologies strictly adhere to this rule, aiming to either get in on, or avoid going against, the current trend. Moving averages make trend recognition routine, because they are typically represented linearly on the pricing chart. The slope of the MA and its location in respect to the current price are both indications of a trend’s existence. If price action is above the MA, an uptrend is present; if below the MA, a downtrend is ongoing.

Pricing Momentum

Although MAs are not a momentum indicator on a stand-alone basis, traders frequently use them in concert with one another within a multitime frame context. Traders can compare MAs with short-term durations to MAs with longer durations in order to establish the relative strength of price action. For instance, if a short-term MA is located above a longer-term MA, then price action is currently trending upward. In the event that the short-term MA is also diverging from the long term MA, then the current momentum of price action has increased.

Support and Resistance

The location of a popular MA is often perceived to be a key technical level — and one that may prompt increasing market participation. Many traders view MA values as guidelines of when to enter or exit a trade. For instance, in the event that price crosses over an MA, it may be interpreted as an indication that the current trend is over, and an exit from opposing positions may be warranted. Conversely, this type of scenario may entice some traders to enter the market in anticipation of a fresh trend being confirmed.

Integrating Moving Averages into Your Trading Plan

Whether you’re a purely technical trader or an investor that makes decisions based upon fundamentals, MAs can be a valued addition to nearly any comprehensive trading plan.

However, selecting the most effective MA for your trading approach can prove to be a challenge. Each type of MA is a bit nuanced and is likely best suited for a specific product, market or trading style. For individuals new to technical analysis, or the marketplace in general, consulting an experienced market professional may be a great way to optimize the utility of moving averages.

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About Daniels Trading

Daniels Trading is an independent futures brokerage firm located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading is built on a culture of trust committed to the firm’s mission of Independence, Objectivity and Reliability.

Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

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