How to use Moving Averages when Trading Crypto – Strategies Explained

The moving average is likely one of the easiest and most versatile instruments, helping you smooth out the noise of price fluctuations and reveal the underlying trends. 

If you use strategies like the Moving Average Convergence Divergence (MACD) or rely on signals from support and resistance levels, you can gain valuable insights and develop robust trading strategies. 

Read more below and explore how to harness the power of moving averages to enhance your crypto trading, guiding you through the techniques and strategies that can transform market chaos into navigable pathways. 

Moving Average Strategies for Crypto Trading

Moving Average Convergence Divergence (MACD) Strategy

The MACD is a momentum indicator that follows trends by illustrating the relationship between two moving averages of a cryptocurrency's price.

It consists of:

  1. MACD line –  shows the difference between the 12-day EMA and the 26-day EMA.
  2. Signal line –  a 9-day EMA of the MACD line.
  3. Histogram – shows the difference between the MACD line and the signal line.

MACD Crossovers

When the MACD line crosses above the signal line, it indicates a bullish signal (buy). Conversely, when the MACD line crosses below the signal line, it indicates a bearish signal (sell).

Divergence

If the price of a cryptocurrency is making new highs but the MACD is not, it could be a sign of an impending reversal. Similarly, if the price is making new lows but the MACD is not, it might indicate a bullish reversal.

Overbought or oversold conditions

When the MACD rises significantly above the signal line, it suggests that the cryptocurrency is overbought and could be due for a correction. The opposite is true when the MACD falls significantly below the signal line.

Example

Consider a scenario where Bitcoin's price is going up, and the MACD line crosses above the signal line. This crossover indicates a potential buying opportunity. If, later on, the MACD line crosses below the signal line, it might signal a good point to sell.

Moving Average Crossover

A moving average crossover occurs when a shorter-period MA crosses over a longer-period MA. When this happens, it indicates a potential change in the trend. Traders often use two MAs with different time frames (one short and one long) to generate signals.

  • Bullish crossover (Golden Cross) – this happens when a short-term MA (e.g., 50-day SMA) crosses above a long-term MA (e.g., 200-day SMA). You can interpret it as the start of a potential uptrend.

Example 

Imagine Ethereum's 50-day SMA crosses above its 200-day SMA. This golden cross is a bullish signal suggesting that Ethereum may enter a prolonged upward trend. Traders might consider this a signal to enter a long position.

  • Bearish crossover (Death Cross) – this occurs when a short-term MA crosses below a long-term MA, indicating the beginning of a potential downtrend.

Example 

Suppose Litecoin's 50-day SMA crosses below its 200-day SMA. This death cross signals a bearish trend, suggesting that it might be a good time to sell or short the asset.

As a real example, a death cross was observed in the Bitcoin chart in mid-2021, where the 50-day MA crossed below the 200-day MA. This pattern is often considered a bearish signal and may prompt traders to consider selling their positions to avoid potential losses.

Bitcoin and moving average.png

Source: CryptoPotato

The Support and Resistance Strategy 

The support and resistance strategy using moving averages is about identifying potential price levels where a cryptocurrency might encounter buying or selling pressure. Moving averages, such as the Simple Moving Average (SMA) and the Exponential Moving Average (EMA), can act as dynamic support and resistance levels due to their ability to smooth out price fluctuations and highlight underlying trends

When a cryptocurrency’s price approaches a moving average, it often reacts in a way that reflects traders’ collective sentiment. For instance, in an uptrend, a cryptocurrency's price may pull back to its 50-day or 200-day moving average and then bounce higher, indicating that the moving average acts as a support level. Conversely, in a downtrend, the price may rise to a moving average and then fall back, signaling that the moving average works as a resistance level.

Example

Consider Bitcoin trading at $30,000, with the 50-day SMA at $28,000. If Bitcoin's price pulls back to the 50-day SMA and then starts to rise again, you can interpret this as the moving average providing support, making it a potential buy point. 

The other way around, if Bitcoin is in a downtrend and rallies to the 50-day SMA before resuming its decline, the SMA would act as resistance, signaling a potential sell or shorting opportunity. Traders often combine these moving average signals with other technical indicators, like the Relative Strength Index (RSI) or volume analysis, to confirm the strength of these support and resistance levels, thereby improving their trading decisions and risk management.

Combining Strategies for Better Results

Using multiple moving averages and combining different strategies can provide more robust trading signals.

Combine MACD with Moving Average Crossovers

You can use the MACD to confirm signals from moving average crossovers. For example, if a golden cross occurs, but the MACD indicates overbought conditions, you might wait for further confirmation before entering a trade.

Using multiple time frames

Many crypto traders often look at moving averages across different time frames to get a clearer picture of the trend. For example, a trader might use a 15-minute chart for short-term trends and a daily chart for long-term trends.

Practical examples 

Bitcoin MACD and moving average crossover

Take a scenario where Bitcoin is trading at $30,000, and the 50-day SMA is at $28,000, while the 200-day SMA is at $25,000. The MACD line has recently crossed above the signal line, confirming a bullish trend.

Action: you might enter a long position in Bitcoin, anticipating further price increases. You set a stop-loss order at $27,000 to manage risk.

Outcome: if Bitcoin's price rises to $35,000, the trader could consider taking profits or adjusting the stop-loss to secure gains.

Ethereum Death Cross and divergence

Imagine a scenario where Ethereum is trading at $2,000, but the 50-day SMA has crossed below the 200-day SMA, forming a death cross. Additionally, the MACD shows a bearish divergence.

Action: you might decide to short Ethereum, expecting the price to decline. You place a stop-loss order at $2,100 to limit potential losses.

Outcome: if Ethereum's price falls to $1,500, the trader can cover their short position for a profit.

Best Practices When Using Moving Averages

While moving averages and their related strategies can be powerful tools, they’re not foolproof. 

Here are some best practices to consider:

  • Use Stop-Loss orders to protect against significant losses.
  • Don't rely solely on moving averages. Use them in conjunction with other technical indicators, such as Relative Strength Index (RSI), volume analysis, and trend lines, to confirm signals.
  • Stay updated and keep an eye on market news and events that could impact cryptocurrency prices. Moving averages are lagging indicators and may not react immediately to sudden market changes.
  • Before applying any strategy, backtest it using historical data to ensure its effectiveness. This can help identify potential pitfalls and improve the strategy.
  • As market conditions quickly change, you need to stay updated on these changes and adjust your strategy. For example, in a higher-than-usual volatile market, shorter moving averages might be more effective.

Conclusion

Moving averages are a versatile and essential tool in cryptocurrency trading. If you understand and learn how to apply strategies like the MACD, moving average crossovers, death cross, and golden cross, you can gain valuable insights into market trends and make more informed decisions.

However, it's crucial to combine these tools with other indicators and maintain sound risk management practices.