Moving Averages to Identify Market Trends
Keep it simple, stupid!
If you've been around our Discord server much, you will know how we trade: we keep it simple, and don't use much other than a few select tools. Technical analysis, clinical trade management, and macro market understanding are the things we focus most on. This translates to what we teach: a simple and effective system. We do not rely on indicators when day trading, but we do understand their value when it comes to confirming different aspects of trading. Much like fibs can be used to predict future prices (another topic), Moving Averages (MA) play an important role in determining the trend.
What is a moving average?
This is the numerical average of the price of an asset over a period of time. It is a "lagging indicator" meaning it is based on past prices. This is widely used indicator because it is so simple and effective. The only two we really value are the 50MA and 200MA. This means that it takes the last 50/200 candles into consideration and produces the average as a simple number.
Why the 50MA?
This is what people consider to be a good short term tracker the price of an asset. It takes a macro snapshot of the market's short term trend, and removes the noise from the picture.
Why the 200MA?
While on the otherside, we have the 200MA. This is a much larger look at the overall market trend. This will not be skewed heavily by short term volatility because it samples so much data.
Lets see this in action..
1. Death Cross
Take a look at the green circle. This is the death cross. When the 50Day MA crosses over, and falls below the 200Day MA. What this means is that the short term price is bearish, and falls beneath the 200Day Average. Notice the price action shortly after this occured: very bullish with wicks down to ~6400.
2.Golden CrossIf this happens.. Well, you're golden! This is a bullish indicator because it means the short term price action (50MA) is trading above the long term price action (200MA). When it crosses, and goes above, then it is a serious sign that bulls have control of the market.
What about time frames?
This is also something to be considered. The data that is used to calculate is the number of candles. So, the shorter time frames (5M, 15M, 1H) won't have very have the sample size, but a much smaller snapshot of the market. We don't use these. Instead, we consider the validity of the 4H, 12H, and 1D MAs as one of our tools for identifying macro trends.
What is going on now?
Here is the 4H chart for BTC. I didn't label the MAs this time, but when you look at it now, you should be able to explain what is happening. Lets use those reasoning skills
Now this is 1D chart for BTC. If we can continue this consolidation in and above 9k, then we stand a chance to skew the data and have the legendary "golden cross". This is a signal that has a lot of validity with mainstream media because it is so easy to apply. Bloomberg, CNBC, etc all covered when the last golden cross happened, and the FOMO came pumping in - does it have any reason to behave differently?
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