A Moving Average is literally the average price measured for a fixed period that moves over time. It is best understood via an example.
Bitcoins seven day moving average will average the price for the previous seven days and update that over time. A price chart will plot the moving average alongside the actual price movement.
Moving averages start at short intervals such as five or seven days, then are calculated at longer intervals up to 200 days. Moving Averages for shorter time periods tend to be used for technical analysis, while the longer MAs are popular for fundamental analysis.
Moving averages are useful as indicators of resistance levels, essentially indicating likely floors or ceilings to price given the aggregate view they give of price over the longer term.
The slope of a Moving Average can be a useful guide to market direction, as it steepens it suggests that there is momentum in price, whereas a flattening MA might indicate upcoming bearish conditions.
The price chart below is from March 16th, 2021 plotting three moving averages against price. over a seven day period.
- Price is blue
- 7 Day Moving Average is yellow
- 20 Day Moving Average is orange
- 100 Day Moving Average is red
You can see from the chart that price and the short term Moving Averages are closely in sync, but for the longer term 100 day MA trends below them, suggesting that price was due the correction which happened on March 15th, bringing all these indicators into convergence.
Some of the strongest Moving Average indicators are where they cross:
- A shorter Moving Average falling below a longer one is bearish
- A shorter Moving Average rising above a longer one is bullish
- The Death Cross is where the 50 day MA falls below the 200
An often quoted stat for Bitcoin for example, is that Bitcoin’s Monthly close has never been below the 200 week Moving Average – so an average which was first calculated when Bitcoin was 200 weeks old.
The 200 WMA seems to increase like clockwork, and given the length of time it is calculated over, smooths all the volatility in that period and points to Bitcoin’s successful function as a store of value.
Moving Averages are a useful tool when used in conjunction with Cost Averaging, as they provide a way to trim or increase regular purchases based on the slope of 200 day Moving Average.
As with all Technical Indicators, there are levels of complexity to Moving Averages. Experienced traders tend to using more sophisticated variants such as Exponential Moving Averages (giving more weight to more recent data) or Moving Average Convergence Divergence (MACD) which measures the relationship between two moving averages.
Another popular technical tool that serves a similar purpose to Moving Averages is the Relative Strength Index.
Leave a Reply