It’s crucial to learn about moving averages as a beginner in trading. This lesson will cover moving averages and why it’s essential to use them, and arm you with one more technical analysis tool that will make it easier to understand where price are and where they are likely to be going.
Read the following lessons for more beginner trading knowledge:
Introduction
Moving averages are a popular trading strategy worldwide. They are handy for beginners because they are easy to use and simplify confusing price movement data by providing more understandable visual representation.
Moving averages calculate price averages over a certain period of time and automatically draw lines on price charts based on these calculations. On exchanges like Huobi Global, you can choose a price average to be calculated freely within any time period.
The lines even out the volatility of a token’s price and provide more stable tracking of price trends. In the image below, you can see how the moving averages look on a price chart.
Why use moving averages?
You can use moving averages as a tool to ignore unnecessary daily price fluctuations. In addition, they can help you to stay on track with your trading strategy by showing how a token is currently trending and where the support and resistance levels are. Of course, as a trader, you will always want to know if you are in an upward or downward market and which levels must be kept or broken for reversal trend movements.
Moving averages in an upward trend
Traders use moving averages as a support level in an upwards trend. The support is the level that keeps the price from descending further. In an upward trend, the price will hover above the moving average and test it from time to time to ensure the uptrend continues.
If the price bounces from the support line to the upside, this confirms the upward trend will continue. Conversely, the trend might change if the price breaks through the support to the downside.
When the price is trending upwards, the support level is maintained once the line is kept below the price. You can see this in the BTC/USDT chart marked with yellow circles; the price touches the blue line (MA 50) to confirm the up-trend at the beginning, then breaks through MA 50 but receives confirmation from the green line (MA 20). The third yellow circle again confirms the support but it is then broken at the fourth.
Moving averages in a downward trend
Traders use moving averages as a resistance level when the market is trending downwards. The resistance is the level that keeps the price from ascending further. In a downtrend trend, the price will hover above the moving average and test it from time to time to ensure the down-trend continues.
If the price starts to break through the resistance level, it’s indicative of a slowing downward market and impending trend reversal.
When the price trends downwards, the resistance level is above the price chart. You can see this in the BTC/USDT chart marked with yellow circles. After a big pull-back, the price touches the blue resistance line and drops further downwards. Later, it touches the MA 50 resistance again and breaks through to the upside. It is then rejected again but later breaks through to the upside.
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