Technical Analysis: Moving Average - Exponential Wealth Growth Cryptocurrency Exchange Platform

Moving averages can be used to track trends,

and are one of the most popular tools in technical analysis.

I personally also like them,

My undergraduate thesis used signals from northbound funds combined with moving averages to develop strategies.

But after all, they are a lagging indicator,

more of an auxiliary tool in technical analysis,

but should never be ignored.

One,

Basic concepts and features

The parameter of the moving average(MA) is time,

the shorter the time, the closer the MA is to the price chart,

the longer the smoother.

The different colored curves in the above chart are simple moving averages (SMA).

Additionally, commonly used are exponential weighted moving averages (EMA),

mainly applied in MACD histogram.

Here’s the calculation formula for MACD,

using the most common parameters MACD(12,26,9) as an example:

(1) EMA(close,12) = 2/13 × Closing Price + 11/13 × Yesterday’s EMA12

(2) EMA(close,26) = 2/27 × Closing Price + 25/27 × Yesterday’s EMA26

(3) Fast line DIF = EMA12 - EMA26

(4) Slow line DEA = EMA(DIF,9)

(5) MACD = 2 × (DIF - DEA)

MACD application: observe the crossovers between the fast DIF line and the slow DEA line, as well as changes in the MACD histogram, to judge the strength of price movement or trend changes.

Specific interpretations vary,

here’s a reference for indicator application on Wind:

The commonly mentioned golden cross(buy signal) and death cross(sell signal) refer to the crossovers of DIF upward/downward with DEA.

Two,

Usage

(1) Compare the relative position of price and moving average,

to form trend indicators.

(2) Use moving averages (or their envelopes) to form support or resistance levels.

(3) Observe the slope of the moving average.

(4) Double moving averages: compare short-term and long-term moving averages to see if the market is overbought/oversold,

i.e., oscillators; observe crossovers of short-term and long-term moving averages for trading signals,

namely golden cross and death cross.

Three,

Examples

Randomly selected a 4-month daily K-line chart of a certain security,

taking A and B as examples:

A: MACD forms a golden cross buy signal; the chart shows a white advancing three soldiers,

gap up

B: MACD forms a death cross sell signal; the chart shows a bearish engulfing pattern,

bearish belt-line pattern,

tower top (a longer black body indicates a stronger signal).

Four,

Western technical analysis moving average strategies

1. Uptrend: keep long positions if the price line is above MA

(a) Price line breaks above MA,

buy signal

(b) Price line sharply drops after breaking MA200,

but does not break below it,

possible buy signal

© Price line falls below MA,

but the MA is upward sloping,

possible buy signal

(d) *Price line drops rapidly,

falls below the downward sloping MA, but with a large decline,

may trigger a short-term rebound (whipsaw trap)

2. Downtrend: keep short positions if the price line is below MA

(a) Price line above MA,

but MA is downward sloping,

sell signal

(b) Price line begins to fall below the moving average,

gradually approaching the MA,

but falls back before breaking through,

possible sell signal

© Price line above an upward sloping MA,

and rising rapidly,

may trigger a short-term correction (whipsaw trap)

(d) Price hits bottom and rebounds, breaking through MA,

buy signal

3. Horizontal, diagonal, and sideways trends: price fluctuates in a relatively long range,

price line oscillates with the moving average,

be cautious

4. PENTAD trading method: when the price line moves upward(or) downward and crosses the 20-week MA envelope ±1% stop-loss distance(, it issues buy) or sell( signals.

Five,

Some insights

1. The biggest issue with moving averages is that they are derived from prices,

so they are lagging.

2. Correctly choosing the time parameter is very important: long-term is less sensitive,

short-term may produce false breakout signals.

3. Simple moving averages are often not inferior to complex moving averages.

4. Moving averages should be combined with other technical analysis tools.