Maximizing Profits with Moving Average Strategies and Crossovers

Intro

If you ever remember your first time experience in front of a price chart, you are likely to remember seeing some lines in it. You were probably looking at MAs. Moving Averages (MA) are the most typical technical indicator in price charts, and they are probably the first most traders use.

This technical tool offers a simple but powerful approach to getting into crypto markets. It can serve risky and short-term traders as well as those more conservative and long-term investors.

Here, we will discuss their more relevant aspects and how crossovers have gained special recognition as the most used strategy with MA.

Moving Averages: Understanding the Simple Approach

Moving Averages are price indicators plotted in the chart in the form of lines used for the technical analysis of an asset. These are essentially a statistical calculation on the quoting price of a crypto, in this case.

The purpose of calculating the moving averages is to smooth out the price changes by consistently metering and updating the average price. By smoothing the price fluctuations, the unpredictable impacts of sharpening quotation changes are mitigated.

Moving averages take two forms:

1. Simple: where the calculations are based on the mathematical average of prices during some timeframe.
2. Exponential: this calculation places more weight on recent data points over price fluctuations.

Key Aspects

1. A moving average (MA) is a price indicator commonly used in crypto analysis.
2. The moving average helps to balance the price data over a specified term, regularly updating the average price.
3. A simple moving average (SMA) is less responsive, it calculates the mathematical average of a given set of prices over a specific number of data.
4. An exponential moving average (EMA) is more responsive to new information, it adds greater importance to the price changes in a more recent data timespan.

Moving Average Trading Strategy

Moving Averages trading strategy is a method used for identifying trend seasons, likely trend shifts, dynamic support/resistance, and the overall direction of an asset, trying to uncover the underlying market sentiment.

The most used strategy with moving averages lies in spotting crossovers. This method states that a cross of a shorter-period line over a longer-period line gives valuable information to formulate refined trading decisions.

MAs are essentially based on past prices which makes them a type of "lagging indicator". The longer the period chosen for the calculation, the more lag it will carry.

The most recognized periods, like the 200-day or the 100-day, contain more lag since it is tracing prices for the past 200 or 100 days. 50-day and 20-day, are more sensitive in tracing recent price data.

One strategy widely used by crypto investors and traders for following trends is based on the 200-day, 100-day, and 50-day combined as a trio, precisely because of the trustworthiness of their signals. Typically, longer-term moving averages are more suited for long-term investors.

Shorter moving averages are used for short-term trading. In this case, the use of the 50-day, 20-day, and 10-day combined serves well for day traders and speculators.

Crossovers Trading Strategy

A sloping moving average indicates that a crypto asset is likely in an uptrend, while a declining moving average indicates that it is in a downtrend.

This is the principle for understanding crossovers:

• When a shorter period MA crosses above the longer period, traders can say it is a bullish crossover.
• On the opposite, when the shorter period MA crosses below the longer, it is a bearish crossover.

Divergences on MA Crossovers

The principle for crossovers is simple, but it can be extended and improved beyond. For example, integrating divergences approaches and even more, combining other indicators.

A divergence is normally a contrast between the higher highs and lower lows made by the price while the indicator is unable to follow the momentum move.

For example, using just MA we can look at scenarios like:

• Bullish divergence: Price produces lower lows, but the MA flattens or expressly forms higher lows.
• Bearish divergence: Price is making higher highs, but the MA flattens or notably forms lower highs.

Both scenarios indicate an underlying bullish or bearish trend about to appear. 

An advanced method for the application of this concept would come well with the Relative Strength Index (RSI), which is an oscillator indicator of overbought and oversold levels.

For example:

• Bullish divergence: Price produces lower lows, but the RSI is oversold and makes higher lows, with it, MA flattens or forms higher lows.
• Bearish divergence: Price produces lower lows, but the RSI is overbought and makes lower highs, with it, MA flattens or forms lower highs.

Crossovers strategy and MACD

Moving Averages are simple lines plotted in the chart following candlestick formations. There is an indicator like the MACD, which belongs to the oscillators category that can help with an advanced application of crossovers.

MACD stands for Moving Average Convergence Divergence and is based on the difference of two Exponential Moving Averages. This is an interesting approach for the application of the strategy discussed here.

While the MA crossovers strategy is implemented from the perspective of a simple charting tool, the MACD will add an enhancing layer of advancement from the viewpoint of a technical oscillator carrying exponential calculation.

Crossover with MACD work like:

• Bullish Signal: When the MACD Line crosses above the signal line.
• Bearish Signal: When the MACD Line crosses below the signal line.

In both scenarios, traders expect potential trends in the direction of those signals. Moving averages alongside the MACD can confirm trend direction. 

An upward crossover in the MACD, while moving averages are crossing too, is a powerful signal for a long position.

Conclusion and Call to Action

MAs are recognized, after all, as a simple tool. The simplicity of this tool makes it highly suitable for combination with other technical indicators. 

Crossover strategies can be improved using different periods of the same MAs, or even better, integrating other indicators like the MACD and RSI.

In Altrady, you can find a wide range of options to start testing Crossovers strategies and combining Moving Averages. Enroll now through a free trial account.