There are various technical indicators which are important for identifying different trends in the movement of the price of certain assets. Bitcoin is not an exception.
Perhaps one of the most popular, as well as often-used one of them is the moving average. It’s fairly easy to calculate and once you plot it on a chart, it becomes a very prominent trend-spotting took, hence, why it is so important.
What is a Moving Average (MA)?
A moving average is an average price for a certain asset over a specified period of time. One of the most popular MAs is the 200-day moving average.
In order to calculate Bitcoin’s 200-day MA, one would have to take the closing prices of Bitcoin for the last 200 days and add them together. This number is then divided by 200. In order to continue to calculate the MA on a daily basis, one would only have to replace the oldest number with the most recent closing price.
Irrespective of the time period, the calculations are always the same. It’s also important to note that traders can also use different prices to get moving averages on a shorter or longer time frame — such as weekly, monthly, opening, or even intraday prices.
Why is the 200-Day MA Important?
As we mentioned in the beginning, moving averages are oftentimes used to identify a certain pattern or a trend in the movement of the price.
When the current price of a trading asset crosses below the moving average line, this can signal that bears are in control of the price action and, as such, you could interpret this as an indicator for assets further decline. Naturally, if the price crosses above the 200-day MA line, it could potentially signal that bulls are dictating the price action again, at least for a certain period.
Evolve.Markets is a trading platform using MetaTrader 5 trading software, offering most advanced functions and technical analysis tools. Traders are able to use a wide range of indicators in order to plot their further actions and determine their positions.
Using the 200-Day MA Indicator: Entry and Exit Points
Besides identifying trends, moving averages can also be used to find entry and exit market points. In other words, traders can use these indicators to determine whether to invest or to liquidate existing positions.
One of the simplest trading strategies relies on the crossing of two, or, eventually, more moving average lines. The most basic signal is provided when the shorter-term moving average crosses above or below the longer-term moving average line.
So, if you’re using the 200-Day MA as a powerful indicator, a cross of a shorter-term MA (such as the 50-day MA), above it, could signal that a bullish trend might be developing, hence providing a good entry point for a long position.
Using the 200-Day MA Indicator: Identifying Support and Resistance
Another very good use of the 200-Day MA as a strong technical indicator is to signal early support or resistance levels.
For instance, if the price of Bitcoin tends to drift lower in a well-established uptrend, it wouldn’t be that surprising for it to find support at the long-term 200-day MA.
Of course, if the price tends to trend lower, a lot of the traders will be looking for the price to bounce off the resistance of the 200-day MA, which is considered to be a rather major one.
Wrapping it up
The 200-day MA is one of the most powerful trend-spotting indicators because it paints the bigger picture. It provides long-term historic data of the price action and when plotted correctly, could be used for crafting a viable trading strategy.
It provides traders with the crucial tool to identify a current trend or to spot a trend reversal. It can also be used as a signal for incoming support of resistance level. Naturally, the way traders choose to use the 200-day MA is entirely up to them, based on their previous trading experience.
What do you think about the 200-day moving average? Let us know your thoughts in the comments below!
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