Understanding MA Moving Averages: A Deep Dive into Usage Methods

Recently, a follower asked about understanding MA moving averages. Today, I'll provide a general overview.

This article serves as an introduction to moving averages, guiding readers through a progressive understanding of what moving averages are and how to utilize the MA system in trading. Moving averages are one of the most common and fundamental analysis indicators, reflecting average cost changes over a period. The moving average system, formed by multiple moving averages, is often used to assess market trends and can function as support and resistance under certain conditions.

1. Definition of MA Moving Average

Moving Average (MA) is based on Dow Jones' "average cost concept" theory. It applies the "moving average" principle from statistics, connecting the average product prices over a period into a curve. This displays historical price fluctuations and reflects future price index trends, serving as a technical analysis method. It's a visual representation of Dow Theory.

2. Calculation Method of Moving Averages

The MA calculation method involves computing the arithmetic mean of closing prices for a consecutive number of days. The number of days is the MA parameter. In technical analysis, moving averages are essential indicator tools. They use the "moving average" principle from statistics to calculate a trend value from daily market prices, serving as a tool for price trend analysis.

Calculation formula: MA = (C1 + C2 + C3 + C4 + C5 + ... + Cn) / n Where C is the closing price, and n is the number of moving average periods.

For example, the 5-day moving average price for Bitcoin is calculated as: MA 5 = (Closing price 4 days ago + 3 days ago + 2 days ago + yesterday + today) / 5

Moving averages can be classified into three types based on time length: short-term, medium-term, and long-term. Short-term MAs typically use 5 or 10 days, medium-term MAs often use 30 or 60 days, and long-term MAs frequently use 100 or 200 days as calculation periods.

3. MA Moving Average Period Charts

When used with period charts, MA represents multiple values. For instance, on an hourly chart, MA5 represents the 5-hour average, while MA10, MA30, and MA60 represent their corresponding values.

On a 4-hour chart, MA5 represents 5 times the 4-hour average, with MA10, MA30, and MA60 corresponding to 10, 30, and 60 times the 4-hour value, respectively.

In daily usage, MAs are most commonly applied to daily chart periods. Thus, MA5, MA10, MA30, MA60 correspond to 5-day, 10-day, 30-day, and 60-day averages, respectively.

Note: When using the MA indicator, you can set the values after MA according to your preference, such as MA5, MA10, MA20, MA30, MA40, etc. The most commonly used are typically MA5, MA10, MA30, and MA60. The following explanation will focus on these four moving averages.

4. Significance of MA Moving Averages and Granville's Eight Rules

1. When the average line gradually transitions from declining to rising, and the price breaks through the average line from below, it's a bullish signal.

2. If the price falls below the average line but quickly rises back above it while the average line continues to rise, it's still a bullish signal.

3. When the price trend is above the average line, a price drop that doesn't break the average line and quickly reverses upward is also a continued bullish signal.

4. If the price suddenly plummets, breaking below the average line and moving far from it, there's potential for a rebound after the extreme drop, presenting a short-term buying opportunity.

5. When the average line transitions from rising to consolidation or decline, and the price falls below the average line, it's a bearish signal.

6. If the price breaks above the average line but quickly falls back below it while the average line continues to decline, it's still a bearish signal.

7. When the price trend is below the average line, a price rise that doesn't break through the average line and quickly reverses downward is also a continued bearish signal.

8. If the price suddenly surges, breaking above the average line and moving far from it, there's potential for a pullback after the surge, presenting a short-term selling opportunity.

To remember Granville's rules, understanding the concepts of support and resistance is key.

5. Characteristics and Key Points of MA

As mentioned earlier, MA moving averages can be divided into three types based on time length: short-term, medium-term, and long-term. If the market price is below the 200-day moving average, it's considered a bearish market; otherwise, it's a bullish market.

1. Basic Concept and Characteristics of MA

The fundamental idea of MA is to eliminate the impact of random price fluctuations and seek price trends. It has the following characteristics:

1. Trend tracking: MA can indicate and track price trend directions.

2. Lag: Due to its trend-tracking nature, MA often responds slowly to trend reversals.

3. Stability: MA values are resistant to significant changes unless there are substantial daily price movements.

4. Trend amplification: When prices break through moving averages, there's a tendency for continued movement in the breakthrough direction.

5. Support and resistance characteristics: MA often serves as support and resistance levels in price movements.

The MA parameters essentially adjust these characteristics. Larger parameters enhance these features.

2. Limitations

While moving averages have many advantages, they also have notable limitations. They can't respond promptly to sudden market changes and may display deceptive trends. To overcome these drawbacks, it's crucial to combine moving average analysis with other technical methods, such as candlestick analysis and trendline analysis.

6. Common Moving Average Patterns and Their Implications (Using Daily Charts as Examples)

1. Golden Cross Formation

In the early stages of an uptrend, when a short-term moving average breaks above a medium or long-term moving average, it forms a golden cross.

This indicates potential price increases: When the short-term MA5 (white line) crosses above the short-term MA10 (yellow line), it's called a golden cross. Similarly, when the short-term MA10 (yellow line) crosses above the medium-term MA30/MA60 (purple/blue line), it's also termed a golden cross.

2. Death Cross Formation

When a short-term moving average falls below a medium or long-term moving average, it forms a death cross.

This suggests potential price declines: When the short-term MA5 (white line) crosses below the short-term MA10 (yellow line), it's called a death cross. Likewise, when the short-term MA10 (yellow line) crosses below the medium-term MA30/MA60 (purple/blue line), it's also termed a death cross.

3. Bullish Alignment

In a stable uptrend, when the 5-day, 10-day, 30-day, and 60-day moving averages are aligned from top to bottom and moving upward to the right, it's called a bullish alignment.

This indicates potential significant price increases: From top to bottom, the short-term MA5 (white line), short-term MA10 (yellow line), medium-term MA30 (purple line), and medium-term MA60 (blue line) aligned upward form a bullish alignment structure. This represents an upward price trend.

4. Bearish Alignment

In a downtrend, when the 5-day, 10-day, 30-day, and 60-day moving averages are aligned from bottom to top and moving downward to the right, it's called a bearish alignment.

This suggests potential significant price decreases: From bottom to top, the short-term MA5 (white line), short-term MA10 (yellow line), medium-term MA30 (purple line), and medium-term MA60 (blue line) aligned downward form a bearish alignment structure. This represents a downward price trend.

5. In an uptrend, when prices are above moving averages in a bullish alignment, these averages can be seen as support levels for the bulls. When prices pull back to the moving averages, each average provides support, encouraging buying that pushes prices up again.

6. In a downtrend, when prices are below moving averages in a bearish alignment, these averages can be seen as resistance levels for the bears. When prices rebound to the moving averages, they encounter resistance, triggering selling that further pushes prices down.

7. When moving averages transition from rising to falling (forming a peak) or from falling to rising (forming a trough), these are turning points that may indicate a trend reversal.

This concludes our introduction to the moving average system. The study of MA moving averages originated in the stock market, where related theories and applications gradually matured. Although the cryptocurrency market differs from the stock market, technical analysis principles are universally applicable. Various theoretical knowledge can be applied to cryptocurrency investment analysis. This article combines daily analysis experience to provide a comprehensive overview, aiming to benefit those committed to long-term participation in the cryptocurrency market.

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