Highlights ①. Gate's "Basic Futures Courses" course introduces various methods of technical analysis that are commonly employed in futures trading. These courses aim to help traders establish a comprehensive framework for technical analysis. Covered topics include the basics of Candlestick charts, technical patterns, moving averages, trend lines, and the application of technical indicators. ②. In Course 18 of the "Master Technical Analysis" series, we introduce you to moving average analysis, including its significance, meaning, features, and application in trading.
1. What is the moving average? The Moving Average (MA), often referred to as the Simple Moving Average, is a key analytical tool in financial markets. It's derived from the average cost concept of the Dow Jones Industrial Average and incorporates the statistical principle of a 'moving average'. This technique creates a curve that represents the average prices of a particular asset, such as a cryptocurrency, over a specified trading period.
The MA is instrumental in reflecting price changes and directional movement, aiding traders in forecasting potential market trends. Essentially, it is a digital, chart-based visual embodiment of Dow Theory and Wave Theory. Below are examples of MAs calculated over various time periods:
2. Features & Technical Meaning ①. Average Cost a. The Moving Average (MA) calculation reflects the approximate average cost of an asset within a specific period. This is derived from aggregating prices over that period and dividing by the number of price points.
b. As such, the MA serves as an intuitive and vivid representation of the market's average cost. It allows traders to quickly gauge market conditions. By comparing the positions of the K-line (price line) to the MA, traders can assess potential profit and loss scenarios for long, medium, and short-term investments.
c. In the accompanying diagram, it is shown that when three different MAs all trend downward (bearish), it indicates a market condition where most holders may experience losses during the observed period.
②. Support and resistance a. The MA, which objectively reflects the average holding cost of a position, can act as a support level for price movements. When the price of an asset approaches the moving average, reaching a point where most positions have little to no profit, selling pressure tends to decrease. In response, buyers may increase their positions, aiming to prevent the price from falling further below the cost level. Additionally, traders who missed earlier opportunities to buy at lower prices may enter the market, anticipating a potential rebound. These factors collectively influence the balance between supply and demand, potentially shifting the price movement from a bearish to a bullish trend.
b. Conversely, the MA can also act as a resistance level. When the price of an asset rebounds to approach the MA, it can trigger significant selling as long-term holders seize the opportunity to minimize losses, leading them to sell their assets. Simultaneously, traders who purchased at lower prices may start closing their positions to secure profits, resulting in an increased supply over demand. This shift often causes the price to fall again.
c. The accompanying diagram illustrates the Bitcoin (BTC) market from early to late 2022. In this period, the MA30, MA60, and MA120 all acted as resistance levels, leading to price reversals from bullish to bearish trends, indicative of an overarching bear market.
d. Moving averages help to identify support and resistance levels as follows
I. Mark the support and resistance levels by previous highs and lows.
II. Identify the support and resistance levels from the previous dense trading period.
III. Support and resistance levels identified by the trend line.
IV. Support and resistance levels marked by the golden ratio line.
V. Support and resistance levels marked by the Fibonacci sequence.
③. Breakout of the MA: possible continuation of the original trend a. After the coin price breaks through the moving average, whether upwards or downwards, it tends to move in the direction of the breakout for a while. Even if it reverses to go against the breakout direction for a while, the detour tends to be a temporary one and it will turn around to resume the original direction again immediately when it hits the MA again.
b. The signal for trend continuation can be double confirmed if MA and consolidation pattern are broken simultaneously.
c. As illustrated in the following diagram, as the BTC coin price successively broke down MA5, MA30, MA60, and MA120, it kept falling all the way from around 20,000 USD to about 16,000 USD, with a drop of approximately 20%.
3. Characteristics of MA ①. Low sensibility a. The moving average is less sensitive to market changes. This means it can give a rather slow response as the coin price undergoes sharp fluctuations in a short period. So it is common in actual trading when the coin price has already reversed direction, the moving average is still moving along the original trail. By the time the moving average emits buy or sell signals, the indicated trend has already fared for a quite a while. How tardy the MA is in responding to market changes depends on its term. Typically speaking, the longer the period of the moving average, the tardier it is.
b. The moving average has a much lower sensitivity compared with K-line patterns. It is slower than most other trend analysis methods for giving trading signals. This is especially true for medium to long-term moving averages, which exhibit significant tardyness in reflecting market changes.
②. Identify and predict trends a. Generally speaking, the direction of the moving average indicates the direction of the trend, and the angle of the moving average represents the strength of the indicated trend. That is to say, a downward MV often suggests a bearish trend, while an upward MA usually indicates a bullish trend. Short-term MA reflects the short-term trends, medium-term MA stands for medium-term trends, and long-term MA reflects the long-term trends.
b. The angle of the MA indicates the momentum gained by the price to move towards the indicated direction. The larger the angle, the stronger the momentum for the price to go up or down, depending upon the moving direction of the MA.
4. Classification of MA On a daily candlestick chart, moving averages can be classified into three types: short-term , medium-term, and long-term . Accordingly, there are short-term moving average combinations, medium-term moving average combinations, and long-term moving average combinations.
①. Short-term moving average In practical trading, moving averages calculated over periods shorter than one hour, such as 30 minutes and 15 minutes, are categorized as short-term moving averages. These shorter-term MAs are more responsive to market fluctuations compared to their long-term counterparts, enabling traders to closely monitor and react to price movements in a timely manner. However, an over-reliance on short-term MAs can lead to a narrow focus, akin to 'not seeing the forest for the trees.' This myopic view may cause traders to overlook broader market trends and dynamics, potentially resulting in significant losses.
②. Medium-term moving averages The moving average with a period of 4 hours and 24H is called the mid-term moving average.
③. Long-term moving averages A weekly moving average is called a long-term moving average, which serves as a basis for judging whether the market is currently experiencing a bull or bear cycle.
5. Moving Average and Trend ①. Trend Obedience a. In actual trading, the normal state is a short-term trend complying with medium-term trend and medium-term trends conforming with long-term trends. When the three trends move in the same direction, called MA obedience, it suggests traders should either adhere to current positions or stay out of the market.
b.The trading signals emerge when the three trends break the normal state and diverge in the running direction, such as when short-term trends contradict medium-term trends, or medium-term trends go against long-term trends. The abnormal state of trends often suggests opportunities to enter or exit.
c. MAs can also be categorized into these two states： obedience and contradiction.
d.MAs obedience refers to short-term averages obeying medium-term averages, medium-term averages obeying long-term averages, daily lines abiding weekly lines, and weekly lines obeying monthly lines. In such a case, one only needs to observe the direction of the long-term MA to judge the market status: an upward long-term moving average represents a bullish market, while a downward long-term moving average indicates bearish trend.
e.The MA contradictions usually occur when the market trend begins to reverse. If you see the coin price contradicts the short-term moving average, the short-term average contradicts the medium-term average, the medium-term average contradicts the long-term average, the daily chart contradicts the weekly chart, and the weekly chart contradicts the monthly chart, it often suggests potential for trend reversal.
②. Trend Analysis a. 1. The moving average serves as a clear and direct representation of market trends, offering traders a quick and easy way to grasp the overall market movement at a glance, without the need for extensive technical analysis. This simplicity sets it apart from more complex methods like Dow Theory, which necessitates the comparison of relative positions of previous highs and lows, as well as subsequent ones, to glean comprehensive market insights. In contrast, the moving average straightforwardly mirrors the market trend: its direction indicates the trend direction, and its period corresponds to the duration of the trend it represents.
b. 2. The moving average is more agile than Dow Theory in responding to market changes, although both the two show tardyness in this aspect. MAs also allow traders to get timely responses by using combinations of MAs of long, medium, and short-term.
c.The time period of the moving average roughly corresponds to that of wave movement, and the turning points of the moving average often mark the start and end points of waves.
6. Summary The moving average, a cornerstone tool in technical analysis, assists traders in discerning the direction of market trends and in identifying optimal entry and exit points. This article serves as an introductory piece to the moving average technical analysis series, laying down essential facts and concepts about the moving average. To deepen your understanding of this tool and its practical applications, it is advisable to actively incorporate it into your trading practices. Doing so will not only solidify your grasp of moving average analysis but also pave the way for mastering more advanced analytical techniques.
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Disclaimer This article is for informational purposes only and does not constitute investment advice. Gate is not responsible for any investment decisions you make. Content related to technical analysis, market assessments, trading skills, and traders' insights should not be considered a basis for investment. Investing carries potential risks and uncertainties. This article offers no guarantees or assurances of returns on any type of investment.
