The moving average is the simplest indicator, but it is the most classic. It represents the average price over N periods, reflecting the current average price of the market, and can also indicate whether the current position is bullish or bearish.
1. What is a moving average?
Moving Average: Also known as the moving average line, it calculates the average closing price of a cryptocurrency (or stock) over the most recent N days, and connecting these points forms a moving average line.
The essence of the moving average lies in reflecting the average holding cost of the market and the price trend over a period of time.
Commonly used moving averages include:
MA5: 5-day moving average, average cost for the past week
MA10: 10-day moving average, average cost for the past two weeks
MA20: 20-day moving average, average cost for the past month
MA60: 60-day moving average, average cost for the past quarter
MA120: 120-day moving average, average cost for the past half year
MA250: 250-day moving average, average cost for the past year
Among them: MA5 and MA10 are short-term moving averages; MA20 and MA60 are medium-term moving averages; MA120 and MA250 are long-term moving averages.
In daily discussions, we often mention the following terms:
Weekly Line - MA5
Monthly Line - MA20
Half-Year Line - MA120
Yearly Line - MA250
2. The 3 core uses of moving averages
1. Determine the direction and strength of price trends
① Moving average trending upwards: Indicates that the average cost in the market is rising, bulls are dominant, representing an upward trend. Suitable for holding assets and waiting or looking for opportunities to buy on dips.
② Moving average trending downwards: Indicates that the average cost in the market is decreasing, bears are dominant, representing a downward trend. Caution is needed when entering the market; those already holding assets should tighten profit-taking and stop-loss, beware of declines.
③ Moving average flat: Indicates a flat trend, price fluctuating narrowly within a range, with balanced bullish and bearish forces. Suitable for waiting or buying high and selling low.
As for trend strength, it requires multiple moving averages to be combined for judgment:
Strong upward trend: moving averages from short-term to long-term, arranged in a bullish trend from top to bottom.
For example: MA5 > MA10 > MA20 > MA60
Strong downward trend: moving averages from long-term to short-term, arranged in a bearish trend from top to bottom.
For example: MA60 > MA20 > MA10 > MA5
Fluctuating trend: Long and short-term moving averages are confusingly crossing within a range, with no clear upward or downward direction.
Summary:
Bullish moving averages arranged upwards, strong bulls, suitable for holding assets and buying on dips near the moving average.
Bearish moving averages arranged downwards, bears are dominant, suitable for exiting to observe or reducing positions on rebounds.
Flat moving averages with narrow fluctuations, unclear trends, can observe with no positions, or use small positions for trading, buying high and selling low, waiting for clear trends.
2. Observe support and resistance
Support function: When the price drops near a certain moving average, stops falling, and starts to rebound, this moving average provides support for the price.
This is because the moving average reflects the average cost. For example, the 20-day moving average represents the market's average holding cost over the last 20 days; when the price drops near the 20-day moving average, it reaches everyone's cost line.
From a psychological perspective, since everyone hasn't made a profit yet, they are unwilling to sell; meanwhile, those waiting outside feel this price is relatively appropriate and start bottom-fishing, forming support at this price and beginning to rebound.
Resistance function: When the price rises near a certain moving average, it can't continue to rise and starts to fall, that moving average acts as a resistance level for the price.
For instance, if the price rises near the 20-day moving average, it reaches everyone's cost zone. Many are worried about the price dropping again, so they quickly sell to protect their capital. Observers outside see too much selling pressure and also hesitate to enter, resulting in inability to push the price up, which then turns downward.
This is just an example using the 20-day moving average; the choice of moving average depends on your type of trading:
Ultra-short-term traders can refer to the 5-day and 10-day moving averages;
Swing traders can refer to the 20-day and 60-day moving averages;
Long-term traders can refer to the half-year and yearly lines.
The logic is that when the price stands above the corresponding moving average and successfully retests it without breaking, support is formed, allowing for purchases; if it breaks, then sell.
It's important not to become overly obsessed with a single moving average; it's better to use multiple moving averages together. For example, when both short-term and medium-to-long-term moving averages are in a bullish arrangement, it indicates that the market is forming a consensus and has strong upward momentum; waiting for a retest of support and stabilization will allow for low-positioning.
For beginners, it is advisable to avoid participating in downtrends, as the operational difficulty is high and rebounds are difficult to control.
As shown in the diagram, once an upward trend is formed, it is difficult to change in the short term. Each time it retests support levels, it is more friendly for beginners.
3. Use moving average golden crosses/dead crosses to find buy and sell points
Golden Cross: Refers to the short-term moving average crossing above the long-term moving average; the intersection point is called a golden cross. It indicates that many people are optimistic in the short term, and there is a high desire to buy, pushing the average cost upward.
As shown in the diagram, the 5-day moving average crosses above the 20-day moving average, forming a golden cross, with moderate volume increase, leading to a price rise, suitable for buying near the golden cross.
Dead Cross: Refers to the short-term moving average crossing below the long-term moving average, forming a dead cross, indicating that many short-term bearish sentiments prevail, leading to selling pressure that drives the price down, causing the short-term average cost to fall below the long-term average cost, and the trend may turn downward or fluctuate.
When using golden crosses/dead crosses to find buy and sell points, pay attention to the following points:
1. Prefer golden crosses when the overall price trend is upward, as the signal is more reliable.
2. Combine trading volume to verify effective or ineffective golden crosses/dead crosses.
★ Golden cross signals that appear when trading volume moderately increases are more reliable, indicating real buying interest.
★ Golden crosses that appear when trading volume continuously decreases may be false breakouts, beware of market manipulation.
★ Dead crosses appearing when trading volume is high but the price does not rise are more reliable signals, indicating funds are fearful of high prices and are exiting.
★ Dead crosses appearing when trading volume decreases may indicate a continuation of an upward trend, where market makers induce selling to flush out weak hands for further upward movement.
3. Precautions for using moving averages
1. Moving averages are lagging indicators and should be analyzed in conjunction with volume, price, KDJ, and other indicators.
2. Choose moving average periods that match your own trading style.
3. Select moving averages according to different market environments.
In a clear one-sided trend: try to choose medium to long-term moving averages as reference, avoiding disturbance from short-term signals.
In a fluctuating market: choose short-term moving averages as reference, tighten profit-taking and stop-loss, and act quickly, buying high and selling low.
4. More moving averages are not necessarily better; generally, using 2-3 moving averages is sufficient. Too many references can lead to confusing signals.
5. Try to only participate in assets in an upward trend, avoiding downtrends, especially for beginners; aligning with the trend is a wise choice.
6. Trading discipline is paramount; whether using a single moving average or a dual moving average strategy, always prioritize stop-loss. This is the core element of all trading systems, and a system without stop-loss is meaningless.
In conclusion
Trading is not about complexity; rather, simplicity leads to longevity.
Some have built complex trading systems and rely on various indicators, yet struggle to achieve stable profits; others rely solely on moving averages to achieve compound returns.
The core lies not in the system but in discipline.
No matter how good the system, without trading discipline, everything is in vain.
Moving averages are not a magic weapon for victory; their core significance lies in providing you with references, allowing you to see the larger trend and manage dynamic positions using support and resistance, providing a standard for executing discipline.
However, how to use them specifically depends on the individual, on your emotions and psychology.
