Moving Averages are calculations of the average price over the last X amount of time. They are a great way to identify the overall trend an asset is going, enabling get a good picture of the overall direction and trend of the market. In addition, moving averages are great for identifying reverses in a trend, as prices cross with the moving average line, we can confirm that a reverse is taking place and we can capitalize on that change.
Commonly used Moving Averages
The most popular simple moving averages include the 10, 20, 50, 100 and 200. On the Bitcoin Price chart above, we see the 50 day moving average (white) and 100 day moving average (blue). In both cases, we see a nice overall positive trend developing. We get a higher highs. And our higher lows, and we can draw ourselves in a nice parallel channel there. And it really captures the development of this trend very effectively.
We need to also keep in mind though, that these are lagging indicators. They look historically, so while we have a nice cross here that happens to work out, and then they define this particular trend, we fall into this trend.
We can see on July the 15, prices crossed the 50 day moving average and confirmed that there was a reversal in the upward trend. This shows the power of moving averages to identify and confirm changes in the overall trend. Very often, when prices cross with a moving average it is a indicator to pay closer attention and be more aware of changes in the overall trend.
Moving Averages as Support and Resistance
And that’s important to remember. Another cool thing about moving averages, they can often act as areas of support and resistance. We can see here our 200 day moving average comes down, becomes an area of resistance before getting back tested again. Comes back down, acts as support multiple times before being broken back, testing as a resistance, and then having the price collapse.
So moving averages very, very useful for identifying trends on both short and longterm resolutions. And we can be using the crosses of different species to identify trend changes and project trends into the future so that we can utilize them for trading.