3 Ways To Use Moving Averages To Read Market Dynamics Traders Should Know About

The first step to trading successfully is to identify medium- and short-term trends. Traders who stay on track and apply risk management principles often make profits. An equally important process in the trading process is the calculation of the entry point.

Often times, dealers try to find the optimal entry point and end up missing a large part of the rally. When they see the market moving up, the buying demand continues to rise and often they buy near the top.

To avoid such mistakes, it is important to have a simple system in place to make purchases. Every trader wants to buy low and sell high, but mouth trading is easy to do is a different story. Hence, traders should focus on capturing much of the rally by taking as little risk as possible. Let’s learn some simple strategies for doing this.

Trade in a sectoral market

Although price action is volatile and random in an area market, it is still tradable. If the ranges are too tight, it is better to sit on the sidelines rather than trying to initiate a position.

Daily ADA / USDT Chart | Source: TradingView

On the other hand, if the range is well defined and large, as in the example above, traders can trade it. The simple method is to buy when the price rebounds from the support area and take profits near the resistance of the range. The stops for such trades can be held just below the range’s support.

The more hits in both the support and resistance areas of the span, the better it is to act as the likelihood of gear movement is low. Typically, any area-based action is followed by a strong upward or downward movement. Therefore, if the trend changes, traders should change their trading strategy accordingly.

How to buy in a bull market with moving averages

After the uptrend began, the asset continued to make higher highs and higher lows. Traders who continue to wait for a significant correction to buy will miss the drive. Therefore, when traders identify the 20-day Exponential Moving Average (EMA) and 50-day Simple Moving Average (SMA) peaks, it is time to look for an entry point.

BNB / USDT daily chart | Source: TradingView

Binance Coin (BNB) started an uptrend in February when the moving averages started rising and the Relative Strength Index (RSI) stayed in the overbought territory.

After the trend becomes established, traders should wait for a low-risk buying opportunity. The 20-day EMA often acts as a strong support in an uptrend. Hence, traders can wait for the price to drop and recover from the 20-day EMA before buying. This offers a low-risk buying opportunity as stop-loss orders can be placed just below the 20-day EMA or below the swing lows.

In the diagram above, ellipses are used to mark points where merchants may have bought. The price has dropped to the 20-day EMA six times, which could be a good entry point. However, on one of the above trades, the stop loss may have been reached.

On March 25, the price broke below the 20-day EMA and a swing low was created on March 16. This could have reached the stop loss of short term traders. However, the bears were unable to keep the price below the 20-day EMA as the bulls bought in as the price fell near the 50-day SMA.

The price briefly climbed above the 20-day EMA on March 27th, again indicating a bullish trend. In such cases, traders can buy on a close above the 20-day EMA or the next high, as this signals that the bulls are making a comeback.

Let’s look at a few more examples.

BTC / USDT daily chart | Source: TradingView

The above chart of Bitcoin (BTC) is a prime example of how traders who buy on a jump from the 20-day EMA (items marked with arrows) can move from a stop just a few days after breaking below the 20-day EMA. Loss will be hit swing deep where the attacks can be held.

This suggests that there is no perfect entry point and traders should be willing to buy back at higher prices if the uptrend continues.

In all three cases, the price found support near the 50-day SMA and bounced back above the 20-day EMA. This is a signal to traders that the uptrend has resumed. This is usually a good entry point due to the well-defined stop loss and high profit potential. On all three occasions the trade was profitable.

Daily FIL / USDT chart | Source: TradingView

During vertical rallies, momentum was so strong that the price did not correct until the 20-day EMA. In such cases, if traders continue to wait for an entry near the 20-day EMA, they could miss the entire rally.

Daily FIL / USDT chart | Source: TradingView

Therefore, when trading currencies that are experiencing a strong vertical rally, traders can shorten the exponential moving average period by 10) ratio for traders.

Moving averages as resistance in a downtrend

After the trend turns into a downtrend, the moving averages tend to act as resistance levels.

BTC / USDT daily chart | Source: TradingView

Bitcoin’s 2018 bear market is a good example of understanding how moving averages work during a downtrend. Each rally stopped near the 20-day EMA, indicating that bears will sell short when price hits that resistance.

After the downtrend becomes established, there are two occasions when the price rises above the 50-day SMA. Note that before this happened the RSI had fallen near the oversold area, which may have attracted traders against the trend.

ETH / USDT daily chart | Source: TradingView

During the 2018 Ether (ETH) bear market, see how the price stayed below the 50-day SMA from June through the end of the year. The recovery rallies have reversed direction from the 20-day EMA or the 50-day SMA.

Don’t waste time looking for the “perfect” engagement opportunity

In some cases, the best entries can also fail because the stops are triggered. After a losing streak, new traders often get discouraged and do not buy at higher levels but wait to buy at their hit stop loss or lower. Because of this, they are missing out on a large part of the uptrend.

During the uptrend, traders should be ready to buy if the trend resumes. Treat each trade as a new one and not fixated on gains or losses from previous trades.

The behavior of each coin is different; Hence, traders should modify the moving average periods to match the price movement of that coin and then set appropriate entry points.

Disclaimer: This article is for informational purposes only, not investment advice. Investors should research carefully before making a decision. We are not responsible for your investment decisions.

SN_Nour

According to Cointelegraph

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