Real Life Examples of Moving Averages for Crypto Trading

Moving averages are versatile tools that smooth out price data, revealing trends and potential market reversals that might otherwise go unnoticed amidst the noise of daily price fluctuations. 

But how do moving averages truly perform in the chaotic realm of crypto trading? 

Read below for more on some real-life examples of moving averages in action, demonstrating their practical applications and effectiveness.

The Benefits of Using Moving Averages in Crypto Trading Strategies

Moving averages are simple to use and highly effective. As a cornerstone in the technical analysis toolkit, moving averages provide traders with a smoothed-out price trend over a specific period. This trend-following, or lagging, indicator is instrumental in:

  • identifying the direction of the market momentum and aiding in the decision-making process
  • trading signals: can help determine optimal entry and exit points; when the price crosses above a moving average, it may be a good time to buy, and conversely, when it crosses below, it indicates a good time to sell.
  • filtering noise: they help filter out the 'noise' of short-term price fluctuations, offering a clearer view of the price trend.

Choosing the Right Type of Moving Average

The type of moving average you choose depends on your trading strategy and objectives. Each type has its advantages:

  • Simple Moving Average (SMA): best for identifying long-term trends.
  • Exponential Moving Average (EMA): more responsive to recent price changes, ideal for short-term trading.
  • Weighted Moving Average (WMA): gives more importance to recent data points, useful for medium-term trends.
  • Smoothed Moving Average (SMMA): reduces lag better than SMA, suitable for filtering out market noise

Example: if you're a short-term trader focusing on quick market movements, an EMA might be more suitable due to its sensitivity to recent price changes.

Selecting the Appropriate Time Frame

Choosing the right time frame is crucial for effective analysis. Shorter time frames (e.g., 10-day MA) are better for identifying short-term trends, while longer time frames (e.g., 200-day MA) are better for long-term trends.

Example: a day trader might use a 10-day EMA to capture quick price movements in Bitcoin, while a long-term investor might use a 200-day SMA to understand the overall market trend.

Examples of Moving Averages in the Crypto Market

Using multiple moving averages can provide a more comprehensive view of the market. Traders often use a combination of short-term and long-term MAs to identify trend changes and potential entry and exit points.

Simple Moving Average (SMA)

The Simple Moving Average (SMA) is the most straightforward type of moving average. It’s calculated by summing up the closing prices of an asset for a specific number of periods and then dividing by that number of periods.

SMA is often used to identify support and resistance levels. A common strategy is to use a 50-day SMA to understand the medium-term trend and a 200-day SMA to gauge the long-term trend.

Real-Life Example: Bitcoin SMA 

In early 2023, Bitcoin's price movement provided a classic example of SMA application. Traders noticed that the 50-day SMA crossed above the 200-day SMA, a phenomenon known as the "Golden Cross." This indicated a potential bullish trend. Indeed, Bitcoin's price surged following this crossover, demonstrating the predictive power of SMA in real-world trading scenarios.

Exponential Moving Average (EMA)

The Exponential Moving Average (EMA) gives more weight to recent prices, making it more responsive to new information. 

EMAs are particularly useful for identifying short-term trends due to their sensitivity to recent price changes. Traders often use a combination of EMAs, such as the 12-day and 26-day EMAs, to generate trading signals.

Real-Life Example: Ethereum EMA 

In the summer of 2023, Ethereum's price displayed significant volatility. Traders using a 12-day and 26-day EMA noticed a "Golden Cross" when the 12-day EMA crossed above the 26-day EMA. This was followed by a notable uptrend, confirming the effectiveness of EMAs in capturing short-term market movements.

Identifying Golden and Death Crosses

Golden and Death Crosses are significant indicators of trend reversals. These crosses provide clear signals for traders to enter or exit the market.

  • Golden Cross: happens when a short-term MA crosses above a long-term MA, indicating a potential bullish trend.
  • Death Cross: occurs when a short-term MA crosses below a long-term MA, indicating a potential bearish trend.

Examples

  1. In early 2023, Bitcoin experienced a Golden Cross when the 50-day SMA crossed above the 200-day SMA, signaling a potential upward trend. Traders who identified this pattern could have entered the market early and benefited from the subsequent price increase.
  2. In the summer of 2023, Ethereum exhibited a Death Cross when the 50-day EMA crossed below the 200-day EMA. This signaled a bearish trend, prompting traders to sell or short their positions, thereby avoiding potential losses.

Weighted Moving Average (WMA)

The Weighted Moving Average (WMA) assigns a specific weight to each data point within the period. The most recent data points receive higher weights, making the WMA more sensitive to recent price changes compared to the SMA.

WMAs are preferred when traders need to place greater emphasis on the latest price movements while still smoothing out the data.

Real-Life Example: Litecoin WMA 

Litecoin, often referred to as the silver to Bitcoin's gold, has seen fluctuating trends. In mid-2023, a trader using a 20-day WMA noticed that Litecoin's price consistently stayed above the WMA line, indicating a strong bullish trend. This insight helped the trader make profitable decisions, showcasing WMA's practical application in real-world trading.

Litecoin WMA 2023

Source: cryptonews

Smoothed Moving Average (SMMA)

The Smoothed Moving Average (SMMA) is a type of moving average that reduces lag more effectively than the SMA. It considers all the data points in the series, not just a subset. 

SMMA is particularly useful for long-term trend analysis due to its smoothing properties, which filter out short-term fluctuations.

Real-Life Example: Ripple SMMA 

Ripple (XRP) experienced a series of regulatory challenges in 2023, causing its price to fluctuate. Traders who applied a 50-day SMMA were able to identify a clearer long-term trend amidst the noise. The SMMA indicated a steady upward trend, helping traders maintain their positions during periods of short-term volatility.

Ripple SMMA

Source: cryptonews

Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two EMAs, typically the 12-day and 26-day EMAs. The MACD line is the difference between these two EMAs, and a signal line (9-day EMA of the MACD) is plotted on top of the MACD line.

Traders look for crossovers between the MACD line and the signal line, as well as divergences between the MACD line and the asset's price, to generate trading signals.

Real-Life Example: Binance Coin MACD 

In 2021, Binance Coin (BNB) showed a significant MACD crossover. When the MACD line crossed above the signal line, it indicated a bullish trend. This was corroborated by the price action, leading to substantial gains for traders who acted on this signal. The MACD also highlighted periods of divergence, helping traders anticipate potential reversals.

binance MACD 2021

Source: THENEWSCRYPTO

Conclusion

While moving averages are not the holy grail of trading indicators, their real-life applications in crypto trading can provide you with a robust framework for navigating the markets. 

They offer insights into market trends and potential trading opportunities. Whether using the straightforward SMA, the responsive EMA, the balanced WMA, the long-term SMMA, or the comprehensive MACD, you can leverage these tools to make informed decisions and improve your chances of success in this high-stakes environment.