One of the most adaptable indicators favored by technical analysts and chart readers is the moving average. There are various types of moving averages available, including simple, exponential, and hull moving averages, with most other indicators incorporating a moving average in their calculations.
The moving average can be applied across any chart time frame, ranging from monthly to 1-minute charts. Consequently, the moving average indicator is arguably the most widely used tool among forex and cryptocurrency traders.
In the following sections, we will explore what the moving average is, how to interpret it, and some strategies that forex and crypto traders can employ with this indicator.
Understanding the Moving Average Indicator
The moving average serves as a formula to calculate the average price movements of a market over a specified period, helping to identify the trend direction and potential buy/sell zones.
Several types of moving averages exist, with the simple and exponential moving averages being the most popular.
Fortunately, traders do not need to perform the calculations manually, as charting software handles that automatically.
The primary distinction between simple and exponential moving averages lies in their responsiveness to current prices. For instance, a simple moving average is calculated by averaging prices over a specific time period but may respond slowly to rapid market changes. In contrast, the exponential moving average is designed to react more swiftly to abrupt price movements by giving more weight to recent prices.
Each moving average type includes a “look back” input period, which informs the formula about how many data points to consider in its calculations. Common input periods are 50 and 200, but any whole number can be utilized.
Once a trader selects the type of moving average and the look-back input, a line will appear on the price chart. This line can provide several valuable insights.
For instance, the direction of the line indicates the trend direction: if the line slopes upward, the trend is considered bullish; conversely, a downward slope indicates a bearish trend.
Additionally, the current price level of the moving average can act as a support or resistance level, signaling potential buying or selling opportunities.
The Significance of the Moving Average Indicator in Forex & Cryptocurrency
Thanks to its flexibility and adaptability, the moving average is one of the most popular indicators among forex and cryptocurrency traders. Beyond the ability to customize the look-back input period and apply it to any chart time frame, the moving average assists in determining the trend direction, which is crucial for deciding the trade side.
Moreover, moving averages can pinpoint price levels, indicating when assets are overbought or oversold, thus aiding in predicting price rallies and corrections.
Trading cryptocurrencies using the moving average is relatively straightforward:
- Log into your account on a leading crypto exchange
- Open a price chart of the digital asset you wish to trade within the daily time frame.
- Apply a 20, 50, 100, or 200-period simple moving average to your chart.
- When the moving average slopes upward, it can signal a buying opportunity, and vice versa.
Integrating the Moving Average Indicator with Other Trading Strategies
While the moving average indicator is highly effective as a standalone strategy, the crypto market is notorious for its volatile price swings, which can unsettle traders and impact their account balances. Thus, when learning to trade cryptocurrencies, traders often use additional indicators to clarify trends and signals.
For beginners looking to delve into crypto trading, consider the following strategies to help you get started:
The Moving Average Crossover Strategy
If one moving average is beneficial, then two should be even better. A single moving average on the price chart can be prone to frequent false signals, especially in a sideways market. Often, cryptocurrencies will experience significant price movements only to quickly retrace.
To mitigate these volatile moves, adding two moving averages of different lengths to the price chart can help traders assess the trend direction without getting whipsawed. For example, overlay the 50 and 200-period moving averages on the chart. When the 50-period line crosses above the 200-period line, it signals an upward trend, prompting traders to buy. Conversely, when the 50-period line crosses below the 200-period line, it indicates a downward trend, suggesting traders should sell.
The ADX Moving Average Strategy
Moving averages generate excellent signals in trending markets, but they can falter in sideways ranges. To filter out sideways markets, traders can utilize the Average Directional Indicator (ADX).
By applying the ADX to your chart, if it rises above a reading of 20, it indicates a trending market, and moving averages will provide more reliable signals. Conversely, if the ADX falls below 20, it suggests a sideways range has formed, and traders may want to disregard any moving average signals.
The Moving Average Convergence Divergence Strategy
The Moving Average Convergence Divergence (MACD) oscillator is a popular indicator that incorporates moving averages. This indicator combines several components into an easy-to-read signal generator.
It can be added to your price chart and appears in a separate window at the bottom of the chart. The MACD consists of two lines that can be traded similarly to the Moving Average Crossover Strategy mentioned earlier.
When the leading line crosses above the lagging line, it is a bullish signal to buy. Conversely, when the leading line crosses below the lagging line, it is a bearish signal to sell.
