TRADING BITCOIN AND CRYPTOCURRENCY WITH MOVING AVERAGES

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Moving averages are good for a number of things, but the best way to use them (in our case anyways..) is for assessing trend and identifying possible levels of support and resistance.

What are Moving Averages?

That’s probably a good place to start..

Moving averages combine price points over a specified time frame and divides it by the number of data points to give you a signal trend line. Sound familiar? You might have heard us talk about “Moving average like lines” (being our base and conversion lines) in our Ichimoku guide.

Or, if you’ve ever used the MACD indicator (Moving Average Convergence Divergence), you’d also be familiar with the simplicity (and often) accuracy that using moving averages has to offer. 

The most basic way to think of moving averages is that it gives you a guide to trend and direction. 

Breaking it Down a Little Further

For example, if you were looking at the 200ma, uses the previous 200 periods (or candles) of trading data, which plotted on your chart will show you trend direction + potential levels of support and resistance. This is relevant for any timeframe you are trading on, however from personal experience, we find the higher MA’s such as the 200 & 300 are more relevant on the higher TF’s such as the 1D and weekly. 

The Moving Averages We’ll Cover in This Guide

• Simple Moving Averages (SMA)

• Essential Moving Average (EMA)

Simple Moving Averages (SMA)

Simple moving averages and exponential moving averages are very similar in that they both measure trends and are calculated in the same manner, but there are some differences between the two and that is the sensitivity that each of them shows to changes in the market.

Simple Moving Averages calculates the averages of price data, while the EMA’s gives more weight to current data. As the name suggest, simple moving averages give us a “Simple” or smoothed data that is a little less reactive to immediate market changes. 

As we mentioned above, if you’ve ever used the MACD indicator, your SMA would be the equivalent of the MACD line, a less reactive, smoother and slightly lagging indicator, where as as EMA is the opposite.  

Still confused? Let’s go further..

Let’s use the 10 MA on a 1hr TF, which is calculated by adding the last 10 periods of closing prices and then dividing that number by 10 to give you an “average” of the last 10 periods of trading data. 

The same rules applies for any time frame that you are trading on or SMA that you are using and thankfully we don’t have to apply any maths to this, because tradingview does it all for us to give you something that looks like this… 

Using Moving Averages to Identify Trend Direction and Make Trades

The bare bones, simplest way of identifying direction with our SMA is the following..

• If we’re trending above, or our SMA is pointing up = bullish

• If we’re trending below, or our SMA is pointing down = bearish 

So, you could just  buy when price goes above the SMA and sell when price goes below it…right?

Well.. that would be a really simply trading strategy that would give us OK results, but we don’t just want ok, we want excellent and if you fell into the trap of only using that strategy, you’re going to give away more profit than you’d make in the long run

… and what about avoiding fake outs?

Avoiding fake outs is easy.. just add another SMA to your chart. In this case where we are using the 10SMA, we’d add the next immediate SMA to our chart, which is the 20 and the same rules apply for whatever SMA you have on your chart (eg 20 > 50, 50 > 100, 100 > 200 etc)

Adding another (larger) SMA gives you a clearer overall idea of whether the trend has actually changed, or where we might find resistance, before a continuation of the overall trend.

Let’s use the 10/20 SMA as an example

By simply adding the 20SMA to our charts, not only can we see a larger overall trend , but we can use it to avoid buying fake-outs on a number of different time frames, not just the smaller ones. The 20SMA gives us that little bit more information we need by taking more data points to give us some bigger picture information that we would have missed with the 10SMA alone.

In fact, using an 10/20 SMA crossover strategy is as easy as it sounds.. look for entries when the 10SMA crosses ABOVE the 20SMA and look for exits when it crosses BELOW. The same can be said for EMA xovers as highlighted below.

This type of strategy yields the best results when combined with other indicators such as MACD, Bollinger bands, Fibs and basic horizontals and trend lines. 

You can learn more about how we used that along with other indicators and TA in the video at the bottom of the page and it’s just another reason why we don’t just rely on a single strategy (or SMA) in this case, for our entries and exits.  

By just using the 10/20SMA x strat only you would have netted some serious profits on the 1D chart.

Exponential Moving Averages (EMA)

So now we know that SMA’s calculates the average price data to give a less reactive, smoother signal, while our EMA gives us more recent data information and is more reactive to the immediate price changes than their SMA cousins. 

This is one of there reasons why EMA’s are sometimes more preferred than SMA’s by traders, but let’s not make a decision until we understand the benefits of each. 

The EMA is calculated by taking the average price over a defined period of time and adjusting it to increase the weight of the recent price data. Any EMA trading strategy can be used in a similar way as the SMA and the two can even be used together in the same cross strategy as the SMA strat shown above.  

Take a look at the image below to highlight the reactiveness or speed of change between the 100 SMA and EMA, clearly showing how the 100EMA gives us the more imediate data, but also how the two can be used together to give further confluence of a trend reversal. 

The chart above represents the difference between the SMA and the EMA, with the EMA reacting the trend changes faster than the SMA. This takes place because the EMA formula gives more weight to recent prices and less weight to the price that occurred in the past. 

EMA Trading Strategies

As mentioned above, you can use an EMA strategy similar to the SMA one we showed above in a number of simple ways, such as:

Price Trend Above EMA’S

• When the price is trending above all EMA’s = bullish (Entry/long Signal)

• When the price is trending below all EMA’s = bearish (Exit/short Signal)

Depending on the time frame you’re on, for example the 4hr or 1D, that could take a while for price to range above all your EMA’s and while you’d probably get some good results from that, there’s sats you’re leaving on the table so leave this strat for the smaller time frames 

You would also use the 10 & 20 EMA’s in the same way as the SMA’s above to avoid fakeouts, helping to avoid buying or selling too early when one EMA is breached.  

Using Your MA’s as support & resistance

Another great way MA’s (both SMA & EMA) can assist with your trading is acting as levels of support and resistance as seen below. 

In the simplest terms, when one MA is broken, the next higher MA can be used as a form of support or resistance, based on whether the breakthrough is a bullish or bearish one.  

10/20 EMA Crossover 

This is an easy one, just as the SMA strategy above.

Buy when your 10/20 EMAx crosses bullish and sell when your EMA crosses bearish. Just like before however, although this strategy is ridiculously simple, you’re also leaving sats on the table if you’re relying on this alone. 

Thankfully, you don’t need to do any hunting for the perfect EMAx indicator because our UNICON EMAx indicator will help you see the perfect crossover point as per the image below. 

Cradle Strategy

 You may have heard of a popular trading method called a “cradle strategy”, which occurs when price breaks through both MA’s to the upside or downside, to pull back into an MA “cradle” or cup, where the price is held up as support before a continuation of that trend.

You would also look to other forms of confluence such as MACDx, volume increase, or major levels of horizontal/trend line S/R to base your long or short position upon. 

EMA FAN (Using Your UTGEMA Fan Tool)

Using our UTG EMA Fan, with only the 9 & 21 EMA highlighted (giving us fast acting crossover signals) could be a strategy that you employ when looking for more immediate entry signals, pending you are able to use other tools like Fibonacci or Ichimoku to gauge whether a trend reversal is occurring, or you’re just experiencing noise before an actual reversal on the higher time frame is about to take place.  

With just this strategy alone, you can see the results are pretty impressive… but what above fakeouts and selling or buying too early??

Easy.. just like the SMA strat above, add another EMA. In this case it’s the 50EMA, use a cross of all 3 EMA’s to avoid buying early and getting an even strong entry or exit signal. 

You can also use it as a level of support (in and uptrend) and a level of resistance (in a downtrend) for when a 9/21 EMA cross occurs. This stops you from entering or exiting the market prematurely thinking that a reversal is taking place, when rather it’s just a minor correction and continuation of the overall trend.  

EMA Break / EMA Support & Take Profit

Building on the EMA fan strategy above, using the much higher TF EMA’s such as your 100 & 200 can be used as final levels of taking profit, support or resistance if all other EMA’s have been broken. Your 200EMA will sometimes act as the last line of defence and can be your top or bottom take profit targets because of how well it’s often respected in trending markets. 

Backtest these strategies for yourself and see how they work

TL:DR SUMMARY

1/ Trading With MA’s is a simple strategy that can yield great results

2/ As simple as it is, using it in conjunction with indicators such as MACD, RSI, Fibonacci or Ichimoku and basic TAwill give the best results

3/ Using multiple MA’s will give better results than just a single MA alone and can be used successfully as levels of S&R when one MA is broken. 

4/ The smaller MA’s work better on smaller time frames and larger MA’s work better on the higher TF’s (Not always, but typically)

5/ SMA’s work well for macro trends, EMA’s work well for more reactive data.