Module 4 – Moving Averages

There are many types of moving averages and one can only use a trading platform to find out what they are however for our purpose, we want to stick to the 2 main ones as they are mostly used and therefore have the most weight.

The two most common ones are:

> Simple Moving Average (SMA): This is calculated by adding up the closing prices of an asset over a specific number of periods and dividing that sum by the number of periods. For example, a 50-day SMA would sum up the closing prices of the last 50 days and divide by 50 to get the average.

> Exponential Moving Average (EMA): The EMA is similar to the SMA, but it gives more weight to recent prices. The formula for calculating the EMA incorporates a smoothing factor, which places greater emphasis on the most recent data points, making it more responsive to recent price changes. It maths, we there is the exponential function to help smooth lines, and hence ema is well suited to a chart that has non logarithmic and logarithmic settings. 

How Moving Averages are used in finding entries and exits, will be part of a trading strategy.
One can use a simple Moving Average trading strategy with the MACD for trading in general however it requires a bit more context along with other chart elements, especially Support and Resistance levels, Candle sticks and Elliot wave theory. Just using MA along with a indicator will lead to lower successful outcomes. However one must understand and use MA along with other chart elements to really gave a good trading strategy.

Here we demonstrate a 200 daily SMA versus a 200 daily EMA

Here (video below) we demonstrate how the moving averages are applied to the Bitcoin chart and how it helps us determine the trend, the areas to make a trade and how this can potentially fit into a trading strategy. This is a tutorial for people who are just starting off using Tradingview and how to use the moving averages indicator as part of your toolset on the charts.

Note: you can expand this video by just watching it in Youtube mode. Click on Youtube in order to have screen settings to your liking.

Definition of a moving average when you look at this video.  

Industry standards vary on which values are best to use in the moving average settings.
Traditionally for the small time frame charts, say from 5 minute to 12 hrs, the 10 and 20 ema is a good guide for a trend.
If the price drops below the 20 ema, then the next level is the 50 ema, followed by the 100 and 200 ema.
Similarly the 10, 20, 50, 100 and 200 SMA is also used …really depends on what represents price action the most in that time frame your looking at.
What we look for is confluence with price, meaning which moving average acts as support or resistance in the trend.

The video will explain all this.

Important note: The 200 daily and weekly SMA and or EMA is a strong guide for the market to be determined bullish or bearish. If one is below the 200 daily or weekly SMA or EMA, that will help determine if the bottom is in or the top is done.
Look at the Bitcoin chart as an example.

A 10 moving average on the daily chart, means the tool draws a line by adding up the last 10 candles and working out their average value and then plot it on that day. When the next daily candle closes, it counts the last 10 candles again and plots its average value. So the moving average is only a reactive indicator, it only tells you what has happened.

Now there are 2 popular moving averages to use. The simple moving average or sma or ma and the exponential moving average which has another formulae it uses to determine the average value in a defined time frame. 

What is a Death Cross?

The “Death Cross” is a term used in technical analysis when two moving averages cross over in a specific way, signaling a potentially bearish trend reversal in the market. The Death Cross occurs when a short-term moving average crosses below a longer-term moving average. It is called a “Death Cross” because it often signals a significant downturn or a bearish phase in the price action.

The most commonly observed Death Cross is the 50-day Simple Moving Average (SMA) crossing below the 200-day SMA. When the 50-day SMA moves below the 200-day SMA, it suggests that the short-term price trend has turned weaker compared to the long-term trend. As a result, traders and investors interpret this crossover as a sign that the market sentiment is becoming bearish, and a potential downtrend might follow.

Traders often use the Death Cross in conjunction with other technical indicators and analysis methods to confirm the bearish bias and to avoid false signals. It is important to note that the Death Cross is a lagging indicator, meaning it is based on past data, and by the time it occurs, a significant portion of the bearish move may have already taken place.

Conversely, there is also a bullish counterpart known as the “Golden Cross,” which occurs when a short-term moving average (e.g., 50-day SMA) crosses above a longer-term moving average (e.g., 200-day SMA). The Golden Cross signals a potential bullish trend reversal, and traders often interpret it as a buy signal.

As with any technical indicator, the Death Cross should not be used in isolation, and it is essential to consider other factors, such as volume, momentum, and overall market conditions, before making trading decisions. Additionally, traders should use proper risk management strategies and avoid relying solely on one indicator for their trading decisions.

In the case of Bitcoin, BTC fall, forcing the short-term moving average to fall over the long-term moving average, the 200-day MA. Second, after a period sustained downtrend. Here, the uptrend is over and prices are retracing marking a climactic sell phase where asset prices drop dramatically as bears step up, forcing lower lows. 

The pre-requisite:

To understand this section, you must know what the definition of a trend is from a traders perspective. This section is also covered under “trends” module.

The first thing a trader must do is find the most suitable time frame and the moving averages combination to that represent the trend. We can only demonstrate this visually with the following BTC chart below.

Key points on the chart:

We have selected the 4 HOUR chart using the 10, 20, and 50 MA on the daily. What is important on this chart is that you can see in the uptrend, bitcoin price action is well represented with the 10 MA on the daily time frame, then followed by occasions with the 20 MA and in blue, the 50 MA on the daily (green).

Now note when the 10 MA (white) crosses over the 20 MA (orange), we see now that the macro trend is also downwards orientated.We can therefore use this in conjunction with the pivot points on the previous example charts, to confirm that there is a change in trend. After that point, if you look at the price action in 2018, the 10, 20 MA became consistent as resistance, not support, which is another confirmation that we are a) in a down trend and b) a bear market or correction phase of the price cycle.

Now look at the bottom of the chart where we highlighted in blue the cross over of the Moving Averages. First the 10 and 20 MA cross over, which is the initial bullish sign and eventually both the 10 & 20 MA cross over the 50 Daily MA (green) and eventually the 200 daily MA (blue) which is known to be a key number for resumption of an uptrend and bull market.

Along with fibonacci, support and resistance levels and moving averages, at times we use the VWAP tool to find resistance and hence help find an entry to short or take profit. It could be that the VWAP has more confluence on price action at the time so do not ignore this strategy.

This video does a good job so we saw no need to create our own (for now).

We tend to use the Alligator Indicator on larger time frames starting with the daily, especially for Bitcoin and Ethereum as a means to find confluence of a trend change. We do not use this indicator in isolation but in context with other elements on the chart.

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