Crypto Markets – Part III
In “crypto markets” part of crypto beginners series I will share with you different techniques of buying and selling, basic indicators and formations, important facts and observations.
Today topic – Moving Averages and MACD
Moving averages are lagging indicators used to gauge the direction of the current trend. They smooth out the day-to-day price action and allow traders to track and identify trends and find potential support and resistance levels. They also form the base for additional technical indicators, such as Bollinger Bands and the MACD.
There are two common types of moving averages, simple and exponential. A simple moving average is calculated as an average of prices over a specific time period. An exponential moving average is similar to a simple moving average, but the calculation reduces the lag factor by placing more weight on the most recent data.
Identifying The Trend
Traders can use moving averages to emphasize the direction of a trend. A moving average line that is rising generally indicates an uptrend, while a moving average line that is falling typically shows a downtrend.
Moving averages can be used as part of a basic entry and exit strategy by identifying price crossovers. When prices move over the moving average line, a trader could interpret a bullish signal and could buy or cover shorts. When prices move under the moving average line, a trader could interpret a bearish signal and could exit or sell short.
Moving Average Crossovers
While prone to whipsaws, multiple moving averages can also be used together to generate crossover signals and indicate a possible change in momentum. Typically, a shorter time frame moving average and a longer time frame moving average are used to find “golden crosses” and “death crosses.” A “golden cross” occurs when the shorter time frame moving average moves above the longer time frame moving average and could indicate a rising bull market. A “death cross” occurs when the shorter time frame moving average moves below the longer time frame moving average and could indicate a falling bear market.
Support and Resistance
Moving averages can also act as and identify areas of support and resistance. Oftentimes, market prices will reverse direction around the same level as an important average. Once market prices fall below that level of support, the average can then act as resistance. Generally, in an uptrend, moving averages will act as support and in a downtrend, they will act as resistance.
MACD – Moving Average Convergence Divergence
The MACD indicator is typically placed at the bottom of the trading chart, in a separate window, beneath the price chart. The Moving Average Convergence Divergence is a relatively easy-to-use tool.
The MACD indicator consists of three components. There are two lines and a histogram. Let’s now discuss each of these separately:
- – MACD Line – The MACD line is the faster line on the indicator. Since it reacts faster it and is more sensitive, it generally moves above and below the second line of the indicator.
- – MACD Signal Line – The MACD signal line is the second line of the MACD indicator. It is called a signal line, because it generates the basic MACD signals. Since the line is slower, it gets frequently breached by the faster MACD line.
- – MACD Histogram – The MACD histogram simply represents the difference between the MACD line and the signal line. The bigger the gap between the lines, the higher the bars that the MACD histogram will display.
Below you will see an example of the MACD indicator:
Crossing the Signal Line
Crossovers of the signal line by the Moving Average Convergence Divergence line are one of the MACD’s staple signals.The signal line is an estimated valuation for the movement of the oscillator that makes bullish and bearish MACD turns easier to see.
When a trader sees that the Moving Average Convergence Divergence turns north, crossing over the signal line, and continues or stays above it, a bullish crossover has occurred. This is a signal that a security’s price is on the rise.
The exact opposite is true when the Moving Average Convergence Divergence crosses down over the signal line. This is a bearish crossover and if the Oscillator continues to drop below the signal line, it’s a good indication that the bears are taking over. Depending on the steepness of the drop and the number of days the drop continues, many traders may prefer to sell before they lose a significant amount of value. This is also a great time for savvy traders to pick up undervalued coins (Buy the dip)
A very simple example is.
The green line shows when the indicator said a positive trend was emerging. The red line is when the indicator said that a negative trend was emerging. Keep in mind, if you look closely there are some false positives. There were times that the indicator crossed positive but the chart continued in a negative direction.
And one from today BTC/USD charts:
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