Everything About Moving Averages: A Simple Guide For Crypto Beginners

Generally, when you notice a sudden increase in the value of cryptocurrencies, you, a crypto trading enthusiast, might feel a strong urge to get into the cryptocurrency market. That’s natural! However, you should be aware that the crypto market is extremely unpredictable, and it is not always wise to trust what you see unless you have the right skills to analyse it. This is where the ability to analyse using trading indicators becomes valuable.

As a beginner, it is not a good idea to start learning about complex indicators that demand extensive knowledge and experience. Given your enthusiasm to learn, we can start with a simple one: Moving Averages. What makes this indicator a perfect choice to begin with is the fact that it can significantly help you improve your trading skills and can be used alongside other significant indicators.  

Moving Average Indicator: The Basics You Should Know

People generally avoid learning about indicators because they worry that it involves complex mathematics. But in reality, it only demands a certain level of common sense.

Let’s consider the topic of Moving Averages. It is like drawing a line on a price chart that shows the average price of something over a certain time. 

Using Bitcoin as an example, the above explained idea can be easily explained. When you go through the price chart of Bitcoin, you can see how frequently the price of BTC changes – every day, every minute, every second.   

With the support of Moving Averages, you can easily eliminate the lack of clarity that occurs due to these frequent price fluctuations, as they pick a number, like 10, 50, 100 or 200, of those fluctuating prices and find the average.  

Simple Step-by-Step Guide to Analysing Moving Averages in TradingView 

You should consider a practical approach to understand the concept of MA better. Let’s explore Simple Moving Averages (SMA) using TradingView. Ready?

Here is the step-by-step guide.

Step 1: Open Trading View

Go to the TradingView website and sign in to your account.

Step 2: Search for a Chart 

Use the search bar to find the chart you want to analyse, for example, “Bitcoin/TetherUS.”

Step 3: Select SMA Indicator 

Click on the indicator icon at the top of the chart. Type “SMA” in the search bar and select “Simple Moving Average.”

Step 4: Understand Indicator Settings 

In the indicator settings, focus on the ‘input’ section. 

• Length: This is the number of periods the moving average considers (e.g., 20 means it looks at the last 20 price points).
• Source: It is what data the SMA uses, like Open, High, Low, Close and more; usually “Close” is chosen.
• Offset: This adjusts the SMA backward or forward in time.
• Timeframe: Select the chart’s timeframe (eg., 1 day, 1 hour)

Step 5: Style and Visibility (Optional)

• Style settings affect how the SMA line looks, like colour and thickness.
• Visibility settings control whether you want to display SMA lines on the chart. 

Step 6: What SMA Helps to Read 

• SMA smoothens our price date and shows the average price over a specified period. It helps identify trends, as the SMA line moves with the general price direction.
• When the price crosses above the SMA, it may be a buy signal (uptrend). When the price falls below the SMA, it may be a sell signal (downtrend). 
• SMA can act as a resistance level; when the price reaches the SMA and struggles to move above, it is a potential resistance point. 

Chart Selection, Time Frame And Length in Moving Averages 

• Chart And Indicator Time Frame Relationship: The key thing to understand is that the “Time Frame” on your chart and the “Timeframe” setting for the indicator can be different. If you set the indicator’s timeframe to the same as the chart, you get a moving average that matches the chart’s timeframe. For example, on a daily chart, selecting “same as chart” gives you a daily moving average.
• Different Time Frame for Indicator: You can also choose a different timeframe for the indicator. For instance, on a daily chart, if you set the indicator timeframe to 1 week, you will have a daily chart with a weekly moving average. This means that even though each candle on the chart represents one day, the moving average considers a longer weekly timeframe for its calculation. 
• Length and Time Frame Relationship: If you set a length of 9 and a timeframe of 1 day, it means the moving average looks at the average of the last nine days of price data, regardless of whether you are on a daily or weekly chart.   

Prime Types of Moving Averages 

You have, by now, probably figured out that understanding Moving Averages is crucial. Calculating them is actually simple, but you need to understand the two main types. In simple terms, there are two types of Moving Averages: Simple Moving Averages and Exponential Moving Averages. 

Like how you have added Simple Moving Averages to your TradingView chart, you can easily add Exponential Moving Averages. The setting section of EMA is almost similar to that of SMA’s, but the calculation involved is entirely different. 

Calculation Formulas for SMA and EMA

Once you understand the basic concepts of SMA and EMA, their calculation part becomes easy. 

How to Calculate SMA

Like what the theory says, SMA gives equal importance to all prices in a specified range. 

Here, ‘A1, A2, ………. An’ represents the closing prices of each day. And, ‘n’ stands for the chosen time frame. 

How to Calculate EMA

The theory clearly explains in the case of EMA more importance is given to recent prices. 

This demands a significant change in the basic formula. 

Here, ‘close’ stands for closing price of the current day. ‘Previous day’s EMA’ is the EMA you calculated for the day before. ‘Selected time period’ represents the number of days you are looking at.

In simple words, to find EMA, you start with a previous EMA value ( usually the first one is the SMA), and then you adjust it based on the latest price. 

Endnote 

Becoming really good at using Moving Averages is one of the first steps for someone interested in crypto trading. Even though it is a simple tool that provides limited information on its own, when you team it up with other indicators, it becomes incredibly strong and accurate. It can be considered as a building block for getting better at technical analysis in crypto trading.

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