Summary
- The moving average (MA) is a calculation of the average price that an asset is trading at over a set period.
- For example, if we are looking at a daily Bitcoin chart with the 20 MA applied, we’re going to see what the average price is over the last 20 periods, i.e., the previous 20 days, hours, minutes, or other set period.
For the sake of this article, we’re going to keep this simple. However, to maximize the effectiveness of moving averages, a trader should backtest as much as possible.
What are Moving Averages?
One of the most popular indicators across all markets is the Moving Average (MA). Not only are MAs used as stand-alone trading indicators and technical analysis tools, but they are also incorporated within other trading indicators, such as within Bollinger Bands. The moving average is exactly what its name implies, a calculation of the average price that an asset is trading at over a set period. This can be in the form of a basic “Moving Average,” which is a simple arithmetic mean, or an “Exponential Moving Average,” which assigns more weighting to the most recent prices.
How To Calculate a Moving Average?
For the sake of this article, we’re going to stick with the basic Moving Average (MA), otherwise referred to as a Simple Moving Average (SMA). For example, if we look at a daily Bitcoin chart with a daily moving average of 20 periods applied, we will see what the average price was over the last 20 periods, i.e., the previous 20 days (as it’s a 20-day moving average).
Thus, as with a simple arithmetic mean, the moving average formula for an SMA of 20 days is as follows: Take the candle closing prices of the last 20 days and divide them by the number of days (20) to get the average value. This average value is represented as a line that moves each day, since each day’s SMA will use the last 20 days including the one it’s on, thereby making it a “moving” average.
It’s important to note that we’re looking at an MA in terms of “periods.” So, if we’re looking at a daily moving average of 20 periods, we’re seeing the average of the last 20 day closes. However, if we look at the 20 MA on a 5-minute chart, we’ll see the average price of the last 20 5-minute periods. Additionally, as this indicator needs to consider the closes of each day, all MAs are lagging indicators, that is to say, they reflect the last close of day, not the current cost.
What are the most common moving average lengths?
The most common moving average lengths are:
- 9-day moving average
- 20-day moving average
- 50-day moving average
- 100-day moving average
- 200-day moving average
The MAs with the lower number of periods are referred to as faster periods, having less of a lag factor. Those MAs with the higher number of periods are referred to as slower periods, covering a longer time period and thereby having a higher lag factor and more price fluctuation and noise.
7-Day Moving Average for BTC/USDT on Phemex
200-Day Moving Average
On the other end of the MA spectrum, is the 200-day moving average. This indicator is used to gauge much longer periods of time, and is therefore a great tool for long-term investments such as crypto.
The 200-day moving average is, as expected, an average of an asset’s price movements over a 200-day period. To calculate this MA, a trader, or a trading platform such as Phemex, will take the asset’s closing price for 200 consecutive days and then divide by the number of days (200). This MA is a moving average because as each new day is added and last day is subtracted to keep the most up to date 200 days, the average will fluctuate, or move.
As with all moving averages, the 200-day moving average is represented by a line in the price chart, moving up and down in accordance with the average price fluctuation.
Why is The 200-day Moving Average Important?
Depending on the type of asset or market a trader is trading in, they will need to look at different time periods — a day trader might not have much use for a 200-day MA, and likewise, a long-term trader will not have much use for an indicator that focuses on a very short amount of time. 200-day MAs are also a very helpful way to see how an asset is performing. It can be easy to think that an asset’s value is plummeting in a bearish turn when looking at a short period candlestick chart, however, when presented with an average that encompasses as much data as a 200-day MA, the picture can look quite different.
Additionally, the 200-day moving average is an incredibly valuable indicator when looking to find upcoming turns in the market. By using a 200-day MA alongside a shorter MA, a trader can look for areas where the shorter MA bounces off or crosses the 200-day MA to inform their trades.
200-day Moving Average vs 50-day Moving Average
The 200-day moving average makes use of a much longer period than a 50-day moving average. For this reason, the 200-day moving average often appears a lot flatter than the 50-day moving average — with smaller fluctuations lost among bigger price movements. Both these MAs have their own functionality and help traders hone-in on different periods, however, their real qualities lie in when they are used together.
- The death cross: When a 50-day MA cuts through a 200-day MA in a downward or bearish motion, this is a very strong indicator of an imminent bear market.
- The golden cross: When a 50-day MA cuts through a 200-day MA in an upward or bullish motion, this is a very strong indicator of an imminent bull market.
The Best Moving Average Indicator For Day Trading: The Moving Average Crossover
We can sharpen the idea presented above by applying more than one moving average and watching for crossovers or cases where the moving averages are diverging or converging.
What is The Moving Average Crossover?
A moving average crossover (convergence/divergence), or MACD, is a trading indicator that appears when a faster moving average (MAs with a lower number of periods) crosses over a slower one (MAs with a higher number of periods). MACDs are used to help identify the shift in the short term (ST) versus the long term (LT) price action. When a crossover happens, it’s usually indicative of an impending reversal in the trend.
It should be noted that traders should not use MAs with a huge disparity in periods, as it makes it much more likely for the MAs to simply be too different, meaning that it will be less likely to find any crossovers. This can be seen below when using a slow Bitcoin 200 day moving average (blue) with a fast 7 day moving average (red).
Ineffective Double Moving Average Crossover (7-day MA and 200-day MA) for BTC/USDT on Phemex
Effective Double Moving Average Crossover (20-day MA and 9-day MA) for BTC/USDT on Phemex
A positive this indicator brings to swing and day traders is that the use of a faster MA in the moving average crossover means that there is a reduction in the lag factor. This is particularly helpful for quick-trading individuals since swing and day trading are much faster types of trading — and one where lagging indicators can negatively impact a trade. This is why the moving average crossover indicator is one of the best moving averages for day trading.
How To Use The Moving Average Crossover?
In the example below, we have a daily chart with a 20-day moving average in red and a 50-day moving average in blue. Notice how there are periods where the moving averages becomes compressed during the consolidations, but does not cross. During these periods of compression, so long as the moving averages maintain their position relative to each other, traders may look at adding to their positions. Traders should look out for when the moving averages begin to interact and cross each other physically, as this is indicative of a reversal in the trend.
Double Moving Average Crossover showing compression/consolidation
Double Moving Average Crossover
The double moving average crossover is the core crossover indicator. It uses two moving averages — one short term (ST), meaning that it’s over a shorter time period compared to the other, and one long term (LT), meaning over a longer time period than the other. The double (or dual) moving average is used to direct trades, as when the short period MA crosses over the long period MA, a signal is generated to trade in the direction of the crossover:
- Buy: If the short MA crosses the long MA in the upward direction, then this is a buy signal to the trader.
- Sell: If the short MA crosses the long MA in the downward direction, then this is a sell signal to the trader.
Triple Moving Average Crossover
The triple moving average crossover is a great tool to study the incoming trend. It’s formed of three MAs: a faster-moving average, an intermediate moving average, and a slower moving average.
The triple moving average can come in two forms:
- Bullish: When a faster-moving average crosses through and above an intermediate moving average, which in turn crosses through and above a slower moving average, this is indicative of bullish behavior, i.e., an impending rise in price.
- Bearish: When a faster-moving average crosses through and below an intermediate moving average, which in turn crosses through and below a slower moving average, this is indicative of bearish behavior, i.e., an impending decrease in price.
Triple Moving Average Crossover for BTC/USDT on Phemex
Other Moving Average Types
In addition to SMAs and moving average crossovers, this indicator comes in other varieties for different trading functions.
Moving Average Envelope
The moving average envelope is composed of two MAs that represent the lower and higher moving price averages of an asset — similar to the standard deviation bands in a Bollinger band. These upper and lower MAs help traders identify whether an asset is overbought or oversold, as well as showing the trading range.
The moving average envelope indicates that the trader should:
- Buy: If the price moves to touch or pass below the lower MA in an envelope, the trader should buy.
- Sell: If the price moves to touch or pass below the upper MA in an envelope, the trader should sell.
Moving Average Channel
The moving average channel (MAC) uses two moving averages, usually with the same periods (20 periods, for example). One is formed up of the asset’s highs and the other of the asset’s lows, thereby creating a channel flowing through the price chart. This use of highs and lows means that the MAs in the moving average channel represent two great support and resistance level lines.
The moving average channel shows:
- Trading patterns: Since the moving average channel gives good support and resistance levels to the price chart, many traders will use it to spot trading patterns, such as continuation patterns, diamond patterns, and more.
- A trend: When the channel is thinner, this is generally indicative of a price trend.
- A breakout: When the channel is thicker, this is generally indicative of a price breakout.
It is important, however, that traders do not solely rely on the moving average channel to provide the resistance and support lines for their technical analysis.
MAC for BTC/USDT on Phemex
Moving Average Hamming
The Hamming moving average, or weighted moving average as it’s otherwise known, reduces the effect of erratic pricing by applying weighting factors to price data based on spectral analysis. This MA type reacts to the price data’s cyclical trends in a better way than SMAs, since it can lower the impact of erratic pricing, and therefore better smooth out, or reduce the noise, in the price chart.
The Hamming MA calculates the spectrum of a finite-sized block of individual wave patterns, and then implies that one distinct wave pattern symbolizes precisely one period on the chart. The Hamming MA is a good way to clear up an erratic price chart and should be used in conjunction with other tools and indicators to make a proper technical analysis.
Moving Average Modified
Modified moving averages (MMAs) are very similar to SMAs. The first point of the MMA is calculated the same as an SMA, however, all subsequent points are then calculated by adding the new price to the first point, and then subtracting the last average from the resulting sum. The difference is then the new point in the MMA.
Put simply, the modified moving average formula is:
where, n is the number of bars, MAt is the current MA value, MAt-1 is the previous moving average value, and Pt is the current price.
The MMA is used in the same way, and indicates the same things as an SMA, however, many traders prefer to use the MMA as it requires less information — a trader only needs to know the last MA value and the new price in order to make the calculation. However, it should be noted that with the introduction of technology, automation, and platforms such as Phemex, MMAs are no longer as much of a facilitator as they once were.
Moving Average Double (DMEA)
A double moving exponential average (DMEA) is used to reduce the lag that is found in SMAs, as these have a lag time that increases with the length of the time period being charted. As the length of time being looked at increases, it will also include more pricing and thus fill the indicator with noise. The DMEA addresses these two issues by employing two exponential moving averages (EMAs) and then subtracting a smoothed-out EMA. This requires more data, but with increased computing power, this is no longer an issue.
DMEAs are useful for those looking at shorter trading periods, such as day traders and swing traders. This is not only because DMEAs reduce the noise, allowing traders to hone-in on the smaller price fluctuations and details of the day, but also because they are faster, having reduced the lag — these being two essential traits for traders looking to make trades in short time periods.
DMEA for BTC/USDT on Phemex
Moving Average Triple
A triple moving exponential average (TMEA) is similar to a DMEA, but it uses multiple EMAs, as opposed to just two. Again, it’s used to reduce the lag of traditional moving averages, thereby allowing for more reliable data for fast trades.
As with all MAs, the TMEA helps traders identify trends, breakouts, signal short-term changes or pullbacks, and provide support and resistance levels.
For a TMEA:
- Uptrend: When the price is above the TMEA, it signifies an uptrend.
- Downtrend: When the price is below the TMEA, it signifies a downtrend.
Moving Average Multiple
The multiple moving average, or Guppy multiple moving average (GMMA), is a technical indicator specifically built to predict breakouts in an asset’s price chart. It’s formed of twelve MAs: six short term (ST) and six long term (LT).
- ST MAs: These are typically 3, 5, 8, 10, 12, and 15 periods.
- LT MAs: These are typically 30, 35, 40, 45, 50, and 60.
The convergence and divergence of these two MA groups should be looked at closely when using this analysis method, as should the spacing between each of the MAs. A few notes should be made:
- Close proximity and parallel lines: When the MAs within a group (LT or ST) are close to each other and parallel, this means that the group is largely in agreement.
- Widening and divergence: When the MAs widen, this means that the group has divergent views.
- Convergence: When the MAs converge, this means that the group view is changing.
Being that the GMMA uses so many MAs, it’s only reasonable that it can be used to indicate multiple things:
- Trend strength: If the LT MAs run parallel to each other, then this shows long-term investor support and therefore a strong trend. This is further supported if the ST MAs repeatedly bounce off the LT MAs.
- Trend weakness: This is indicated when both the LT MAs and ST MAs converge and fluctuate more than usual.
- The start of a trend: This can be seen by a change in price direction accompanied with expanding ST and LT MAs.
- ST reversals: This is indicated when the ST group of MAs cross over each other, then diverge, and finally converge again.
How To Trade Using Moving Averages?
Moving averages are great tools for trading trending markets. They can be combined with different variations of themselves or with other indicators to develop systematic and discretionary strategies.
Here are some great tips on how to use moving averages:
Use moving averages to smooth out price movements and determine the general direction of a trend
When the moving averages are pointing or sloped upward, they indicate that the underlying price action is currently moving in an upward trend. For some people, this takes out the subjectivity of analyzing price action. For example, if we look at the daily chart below with a 20 day moving average applied, we can clearly see that the trend is north over time.
We can also use the SMA to note some important details on the strength of the trend. For example:
- We can see how extended the price is by observing how the moving averages go from being more sharply pointed upward versus beginning to taper off and slant back downward. These details can help us determine whether the trend is heating up or cooling down.
- If the price begins to return to the moving average value (the average of the 20 periods in this case), we can say that the trend may be cooling off or approaching what could be a period of consolidation.
- If the price begins to fall under the moving average, or if the moving average begins to turn back downward, this is also indicative of a change in the trend.
It must be emphasized that this is a lagging indicator, so it only shows what the price is already doing. Despite this, it does help to make these changes more obvious, although slightly late to signal.
Use moving averages as dynamic supports and resistances
One more way we can use the moving averages is as dynamic support or resistance lines — a function that is used in moving average types such as the moving average channel.
As an example moving average support line, let’s say we have a powerful trend reversal where the price has crossed and is now well extended and above the 20 MA in an upward trend. Here, the MA will become the support line. Thus, one way to trade with this, is to buy a return back to the average. This is a point often bought by traders looking to enter into fast-moving trends. It should be noted that, often, it’s the first retest that offers the highest probability of a bounce. Notice, for example, how in the image below the price spends most of its time above the average, and when it finally revisits the MA for the first time, it offers a substantial bounce.
The inverse can be expected when the price goes into a downtrend, falling below the moving average. As can be seen in the moving average example below, the price is in a downward trend, and so this MA then becomes a dynamic resistance.
Using Moving Average (MA) Indicators on Phemex
All moving average indicators are freely available to Phemex users under all trading pairs. To use the MA indicators on Phemex, first open your favorite trading pair. For this demonstration, we’ll use the most traded pair, the BTC/USDT pair. At the time of writing, BTC is trading at just above $42,500 USD:
1 Click on “Indicators” at the top of the chart and a new window will pop up.
2 In the search bar, input “Moving Average,” “Moving Average Modified,” “Moving Average Hamming,” or any other MA indicator you wish to experiment with — keeping in mind that some need to be made by using multiple simple moving averages, such as the GMMA:
3 Click on the indicator once and then press the “x” button to return to the chart. The moving average will have been added to the chart. In this example, we are using the daily chart for the moving average indicator. If we switch to any other time on the chart, the indicator will adjust accordingly. The time frame can be selected on the top left of the chart.
You can now practice your trading analysis using any of the MA indicators.
Conclusion
This wraps up some of the primary ways we can begin to explore using moving averages. It should be noted that, as with all other indicators, these are just “decision support tools” that can be applied independently or with a combination of different forms of price-derived feedback. Moving averages are great tools, since they offer so much insight into trends, breakouts, pullbacks and short-term price changes, and more. Additionally, as there are many types of moving average, and different ways to use them, they are great indicators to practice with when first starting out. As with all approaches, however, be sure to backtest as much as possible to ensure you have the best possible chance of success. One of the main benefits of using moving averages is that you can do this visually in a short amount of time. To make it simple, this can be done easily on trading platforms such as Phemex.
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