Moving Average Crossovers – Strategies Used in Crypto Trading

If you’re trying to find reliable strategies to navigate crypto market fluctuations, you should look at the Moving Average Crossover system. It stands out for its simplicity and effectiveness. 

Whether you're an advanced trader or just starting, understanding how moving averages signal potential buy and sell opportunities can significantly enhance your trading prowess. 

Read below and explore the intricacies of different strategies using the Moving Average crossovers and how these can be powerful tools in your crypto trading arsenal. 

The Moving Average Crossover Strategy

The Moving Average Crossover strategy involves two moving averages of different lengths: 

  1. a shorter one that's more responsive to price changes 
  2. a longer one that's slower to react. 

A crossover occurs when the short-term moving average crosses either above or below the long-term moving average. This event is seen as a potential indicator of a changing market trend, either bullish or bearish.

  • A bullish crossover happens when the shorter MA crosses above the longer MA, suggesting that an uptrend may be starting.
  • A bearish crossover occurs when the shorter MA crosses below the longer MA, indicating that a downtrend may be beginning.

Setting Up Your Moving Averages

To implement the Moving Average Crossover strategy, you need to select the appropriate time frames for your moving averages. Common combinations include:

  • short-term and long-term SMAs: for example, a 50-day SMA and a 200-day SMA.
  • short-term and long-term EMAs: for example, a 12-day EMA and a 26-day EMA.

Example

In early 2023, a trader analyzing Bitcoin set up a 50-day SMA and a 200-day SMA. When the 50-day SMA crossed above the 200-day SMA, it signaled a bullish trend, prompting the trader to buy Bitcoin.

Different Types of Moving Averages Crossovers

Moving Average Ribbon Entry

The Moving Average Ribbon strategy is a robust trend-following technique used in crypto trading. It uses multiple Simple Moving Averages (SMAs) or Exponential Moving Averages (EMAs) to create a 'ribbon' of moving averages, providing a visual representation of market trends.

Here’s how it works:

Formation: the ribbon is created by plotting multiple SMAs or EMAs, such as SMA 5, SMA 10, SMA 20, SMA 30, and SMA 50. While this strategy can be applied to any time interval (e.g., 15 minutes, 1 hour), longer intervals typically offer more reliable signals with reduced risk.

Buy signal (Go Long): the triggering buy signal is when the price moves above all the SMAs, indicating an uptrend and suggesting it might be a good time to enter a long position.

Sell signal (Go Short): the triggering sell signal is when the price falls below all the SMAs, signaling a downtrend and suggesting it might be a good time to enter a short position.

Trade entry: the ideal trade entry point occurs when the moving averages converge closely after a period of sideways price movement. This often forms a base for a breakout in either direction.

The Triple Moving Average Crossover

The Triple Moving Average Crossover strategy is a well-known approach in crypto trading that employs three Exponential Moving Averages (EMAs) of varying lengths to assess market trends. 

Here’s a breakdown of how it operates:

Three EMAs: this strategy uses three EMAs with different lengths—typically a 9-period EMA (short-term), a 21-period EMA (medium-term), and a 55-period EMA (long-term).

Long-term trend direction (55 EMA): the 55-period EMA serves as the long-term trend indicator. If the 55 EMA is below both the 9 and 21 EMAs, the market is considered to be in an uptrend. However, if the 55 EMA is above both the 9 and 21 EMAs, the market is deemed to be in a downtrend.

Medium-term trend indicator (21 EMA): the 21-period EMA acts as the medium-term trend indicator. Signs of an uptrend happen when the 21 EMA is below the 9 EMA and above the 55 EMA. A downtrend is suggested when the 21 EMA is above the 9 EMA and below the 55 EMA.

Short-term trend changes (9 EMA): the 9-period EMA is the short-term moving average that crosses over and under the 21 EMA more frequently than the 55 EMA. An uptrend is signaled when the 9 EMA crosses above the 21 EMA while both are above the 55 EMA. A downtrend is indicated when the 9 EMA crosses below the 21 EMA while both are below the 55 EMA.

This strategy helps traders identify uptrends and downtrends by analyzing the relative positions and crossovers of these three EMAs.

The 13-EMA and 26-EMA Strategy

The 13-EMA and 26-EMA crossover strategy is a widely used method in crypto trading that leverages two Exponential Moving Averages (EMAs) of different lengths to evaluate market trends. 

Here’s the mechanics behind the strategy:

Two EMAs: this strategy employs two EMAs of different lengths—typically a 13-period EMA (short-term) and a 26-period EMA (medium-term).

Buy signal (Go Long): a buy signal occurs when the short-term 13-period EMA crosses above the medium-term 26-period EMA. This crossover indicates an uptrend, suggesting it might be a good time to enter a long position.

Sell signal (Go Short): a sell signal is generated when the short-term 13-period EMA crosses below the medium-term 26-period EMA. This crossover signifies a downtrend, indicating it might be a good time to enter a short position.

This strategy assists traders in identifying uptrends and downtrends by analyzing the relative positions and crossovers of these two EMAs.

The Golden Cross Strategy

A Golden Cross occurs when a short-term moving average (MA) crosses above a long-term MA, typically seen as a bullish signal suggesting that the asset’s price might be entering an uptrend. A classic example of a Golden Cross is when the 50-day MA crosses above the 200-day MA.

Crypto traders usually watch for the crossover of the short-term and long-term MAs.

Buy signal (Go Long): the buy signal occurs when the short-term moving average (MA) crosses above the long-term moving average. This crossover is interpreted as a bullish signal, indicating that the asset’s price might be entering an uptrend. For example, if the 50-day MA crosses above the 200-day MA, it signals a potential buying opportunity.

Sell signal (Go short): the sell signal typically occurs when the same short-term moving average that crosses above the long-term moving average crosses back below it. 

However, many traders might not wait for the exact crossover and could use other indicators or strategies to identify the best selling point. 

Correctly identifying a Golden Cross requires plotting two MAs with different timeframes on a cryptocurrency’s price chart. If the shorter-term MA crosses above the longer-term MA, you’ve identified a Golden Cross.

golden cross moving averages

Source: Coindesk

The Death Cross Strategy

A Death Cross occurs when a short-term moving average (MA) crosses below a long-term MA, typically seen as a bearish signal indicating that the asset’s price may be entering a downtrend. A classic example of a Death Cross is when the 50-day MA crosses below the 200-day MA.

This strategy involves monitoring the short-term and long-term MAs for a crossover. 

Sell signal (Go Short): the sell signal occurs when the short-term moving average (MA) crosses below the long-term moving average. This crossover is interpreted as a bearish signal, indicating that the asset’s price might be entering a downtrend. For example, if the 50-day MA crosses below the 200-day MA, it signals a potential selling opportunity.

Buy signal (Go Long): while the Death Cross strategy is primarily focused on identifying sell signals, a potential buy signal would typically occur when the short-term moving average that crossed below the long-term moving average crosses back above it. Common combinations include the 200-period MA and 50-period MA or the 15-period MA and 50-period MA.

However, this crossover is not part of the Death Cross strategy itself but rather as a Golden Cross, signaling a potential uptrend and a buying opportunity.

If you want to correctly identify a Death Cross, you should plot two MAs with different timeframes on a cryptocurrency’s price chart. If the shorter-term MA crosses below the longer-term MA, that’s your Death Cross.

Pros and Cons of Moving Average Crossovers

The Pros

Simplicity: the Moving Average Crossover System is easy to understand and implement, making it suitable for both novice and experienced traders.

Trend identification: it effectively identifies trends, helping traders align their strategies with the market direction.

Versatility: it can be applied to various time frames and asset classes, including cryptocurrencies.

The Cons

Lagging indicator: moving averages are lagging indicators, meaning they reflect past price data and may not predict future movements accurately.

False signals: moving averages can sometimes generate false signals, leading to potential losses.

Whipsaws: during periods of market consolidation, frequent crossovers can occur, resulting in whipsaws and reduced trading efficiency.

Tips for Using the Moving Average Crossover System

Combine with other indicators

To enhance the accuracy of the Moving Average Crossover System, combine it with other technical indicators such as the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), or Bollinger Bands. These indicators can provide additional confirmation for buy and sell signals.

Example

When using the Moving Average Crossover System on Litecoin, you should also monitor the RSI. If the crossover indicates a buy signal and the RSI is below 30 (indicating an oversold condition), you can be more confident in entering a long position.

Use Stop-Loss orders

Given the lagging nature of moving averages, it is essential to use stop-loss orders to protect against significant losses. A stop-loss order can automatically close a position when the price reaches a predetermined level.

Example

After a Golden Cross in Ripple (XRP), you might set a stop-loss order just below the previous support level to minimize potential losses if the market reverses unexpectedly.

Adjust time frames based on market conditions

The effectiveness of the Moving Average Crossover System can vary depending on market conditions. In highly volatile markets, shorter time frames may generate more reliable signals, while longer time frames are better suited for stable markets.

Example

During a period of high volatility in Binance Coin (BNB), a trader might use a 10-day EMA and a 30-day EMA to capture shorter-term trends. Conversely, in a more stable market environment, the trader might switch to a 50-day EMA and a 200-day EMA.

Backtest with paper trading

Before deploying the Moving Average Crossover System in live trading, it’s advisable to backtest the strategy using historical data and paper trade in a simulated environment. This practice allows traders to evaluate the system's performance and make necessary adjustments without risking real capital.

With Altrady, you can take and backtest your strategy with the MACD with candlesticks generated directly from the exchange. You can keep checking every scenario that you think would work. Once you’ve backtested your strategy enough for your comfort, you can enjoy unlimited free paper trading on our platform. 

Then, you can forward test the Moving Average Crossover on historical data for any cryptocurrency and see which MA combination produces the most reliable signals. Forward testing is essentially the same as backtesting, except you’re using live current data to see if your probabilities from backtesting are still intact. Paper trading allows you to test out different setups for weeks or months to gain confidence before implementing them in live trading.

Conclusion

The Moving Average Crossover system is a robust and versatile strategy for cryptocurrency trading. It helps you identify buy and sell signals, and you can also combine it with other indicators, so you can significantly improve your chances of success when trading crypto. 

While the system has its drawbacks, such as being a lagging indicator and generating false signals in volatile markets, these can be mitigated through careful planning, the use of stop-loss orders, and continuous adaptation to market conditions.