Moving Averages are popular amongst both beginners and seasoned traders. Fundamentally they show the trend and become important indicators of support and resistance.
If you need to refresh the basics of Moving Averages - review our glossary article. But if you already understand how moving averages work - this article will give you more details on how moving averages can provide bullish or bearish signals in trading.
A Price Crossover takes place when the asset price crosses the moving average.
The general principle is:
A bullish signal is when the price crosses a moving average from below.
A bearish signal is when the price crosses a moving average from above.
It is important to keep in mind that the length of a moving average will determine the frequency of a signal. SMA200 is much “slower” than SMA5, as SMA200 takes into account 200 preceding price data points and SMA5 - only 5. And, as a result, the former will be crossing the price less often than the latter.
The Bitcoin price chart demonstrates that the blue SMA200 crosses the price chart significantly less often than the pink SMA5:
As the length of moving averages determines how fast they react to price changes, some analysts use longer moving averages as an indicator of a bigger trend and shorter moving averages as signals within this trend. That way, inside a bigger bullish trend a trader would look for bullish shorter-term moving average crossovers. And vice versa. I.e. trading “in harmony” with a bigger trend.
However, provided the volatility in the cryptocurrency markets, even a longer-term downtrend may present a significant number of bullish crossovers. The image below shows that the price is generally under EMA200. At the same time, it crosses EMA50 up on a number of occasions, presenting, in some cases, decent Buy opportunities (as shown by the price increases afterward).
A Double Crossover takes place when a shorter-term moving average crosses a longer-term moving average. When two different length moving averages cross, they indicate the shift in the momentum, either from the uptrend to a downtrend or vise versa. The popular names for the double crossovers are a Death Cross and a Golden Cross.
The Death Cross is a pattern when a short-term moving average (usually 50 EMA) descends and crosses the long-term moving average (usually 200 EMA) to the downside. Death Cross indicates a BEAR turn in the market.
The Golden Cross, in contrast, refers to a situation when a short-term moving average crosses above the long-term moving average. Golden Cross signifies the BULL turn in the market.
In CEX.IO Broker, you can find the impending intersections of the short- and long-term moving averages by plotting them on the chart like so:
Note that the lagging nature of moving averages may result in a “delayed” signal. For example, in the image below, the Golden Cross (marked by the green oval) takes place after a decent uptrend in the price. The Death Cross (marked by the red oval), though coupled with an unprecedented drop, also occurs after the price has been declining for some time.
So, while the Golden Cross and the Death Cross tend to be surrounded by the green and the red candles respectively, on a bigger trend, they may lead to “late in and late out”.
Moving Averages do not predict prices - they simply demonstrate a trend and possible reversals. By nature, moving averages are lagging. Do not trade by moving averages only. Together with moving averages, pay attention to other indicators, chart formations, volumes, and news.
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