One sweet way to use moving averages is to help you determine the trend.
The simplest way is to just plot a single moving average on the chart.
When price action tends to stay above the moving average, it signals that price is in a general UPTREND.
If price action tends to stay below the moving average, then it indicates that it is in a DOWNTREND.
The problem with this is that it’s too simplistic.
Let’s say that Bitcoin has been in a downtrend (below the moving average) , but some positive news comes out causing it to surge higher.
You see that the price is now ABOVE the moving average. You think to yourself:
“Hmmm… It looks like this pair is about to shift direction. Time to buy this suckerrrr!”
So you do just that. You buy a billion dollars position cause you’re confident that Bitcoin is going to go up.
And then ...
Bammm! You get faked out!
As it turns out, traders just reacted to the news but the trend continued and the price kept heading lower!
What some traders do, and what I suggest you do as well, is that they plot a couple (or more) of moving averages on their charts instead of just ONE.
This gives them a clearer signal of whether the pair is trending up or down depending on the order of the moving averages.
Let us explain.
In an uptrend, the “faster” moving average should be above the “slower” moving average and for a downtrend, vice versa.
For example, let’s say we have two MAs: the 10-period MA and the 20-period MA.
Throughout the uptrend, the 10 SMA is above the 20 SMA.
As you know now, you can use moving averages to help show whether a pair is trending up or down.
By combining this with your knowledge of other trading tools, this can help you decide whether to go long or short.
You can also try putting more than two moving averages on your chart.
Just as long as lines are in order (faster MA over slower MA in an uptrend, slower MA over faster MA in a downtrend), then you can tell whether the pair is in an uptrend or in a downtrend.
Do you want to learn more about moving averages?
In this course you will learn:
-What Is a Moving Average
-How To Use Moving Averages To Identify Trends And Confirm Trend Reversals
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