In the previous editions, we briefly touched on the introduction of technical analysis (TA) including how to identify support and resistance zones - we encourage you to read it for better understanding. Do remember that, as an investor, you should not be too worried about TA or shorter timeframes. They are more relevant for traders who frequently trade to book higher profits, though with higher risks. Today, we will introduce the concept of moving averages.
Whenever you look at, say a 4-hour price chart of a cryptocurrency, one can evidently see a lot of noise (price variations). In order to filter out the noisy data and smoothen the trend, the concept of moving averages (MA) was introduced. There are two types of MA - simple moving average (SMA) and exponential moving average (EMA).
SMA simply takes the average prices of a crypto asset over a period of time. EMA does the same except for the fact it adds more weightage to the recent price data of an asset making EMA more responsive to recent change in price (new information). They both are used to identify the trend of a crypto asset. But the most useful application of MA is to identify support and resistance levels on a chart. The most commonly used are 20, 50 and 100 day MA, with longer MA’s indicating long-term trends. Overall, since price action can be turbulent on its own, MA’s help smooth this out.
As pointed out above, the MA can act as support or resistance. In an uptrend, a 20-day, 50-day or 100-day MA can act as a support level for the crypto asset which means prices generally stay above the MA trendline. Traders use this information to enter a trade hoping to exit after the prices go up in the near future. Below is the 20-day MA chart for Cardano (ADA) - note the arrows where support was held and the price bounced.
Source: TradingView, Binance
However, it doesn’t mean price action will respect the MA’s everytime. There is always a possibility that it can go through it or even reverse before even reaching it. As a general rule, if the price is above the MA, it is an uptrend. If the price stays below the MA, it is a downtrend.
Crossovers refers to the situation in which there are two MA’s on the same chart and one crosses above or below the other. Typically, 20 and 50 MA’s are used for this but can vary depending on the trader’s experience. For example, if a shorter MA (20-day MA) crosses above the longer one, it is called a golden cross and it’s a moderate buy signal - the asset is bullish and prices are expected to go up further. Below is an example of a golden cross on an ADA chart.
Source: TradingView, Binance
Likewise if the shorter MA crosses below the longer one, it is called a death cross and as the name suggests, it is a sell signal.
To summarise, moving averages help to identify the overall trend of a crypto asset, find support and resistance levels to set up a trade. Use them judiciously and you can do better with your short term trades.
Disclaimer:This article was authored by Giottus Cryptocurrency Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.
Read Previous Editions on Technical Analysis