Moving Averages

8.1 Smoothing the noise

Mint's daily chart looked like a mess of red and green candles going in every direction. Hash added a single smooth line that wound through the candles.

"Suddenly I can see where it's going," said Mint.

"That's a moving average," said Hash. "It's the most widely used indicator in technical analysis, and probably the most useful one to learn first."

8.2 Simple moving average

A simple moving average (SMA) is the average closing price over a set number of periods. Each new period, the oldest price drops off and the newest is added, which is why it "moves."

Here's a 5-day SMA for Bitcoin, using illustrative closing prices:

Day	Closing price
1	$98,000
2	$99,500
3	$101,000
4	$100,500
5	$103,000
Total	$502,000
5-day SMA	$502,000 ÷ 5 = $100,400

On day 6, day 1's price drops off and day 6's price is added, and the average is recalculated.

8.3 Exponential moving average

An SMA treats every day equally. An exponential moving average (EMA) gives more weight to recent prices, so it reacts faster to new moves.

The EMA uses a multiplier: 2 ÷ (number of periods + 1). For a 10-period EMA, the multiplier is 2 ÷ 11, about 0.1818.

New EMA = previous EMA + multiplier × (today's close − previous EMA)

Suppose yesterday's 10-day EMA was $100,000, and today Bitcoin closed at $102,000.

Step	Calculation	Result
Difference from previous EMA	$102,000 − $100,000	$2,000
Weighted difference	0.1818 × $2,000	~$364
New EMA	$100,000 + $364	~$100,364

You never need to calculate this by hand. Every charting tool does it automatically. But understanding the formula explains why EMAs react faster: today's price immediately moves the average by a meaningful fraction.

	SMA	EMA
Weighting	All periods equal	More weight on recent prices
Reaction speed	Slower	Faster
False signals	Fewer, but signals arrive later	More, but signals arrive earlier
Common use	Long-term trend identification	Shorter-term trading

8.4 Common periods

Moving average	Typical use
9 or 10 period EMA	Very short-term momentum
20 or 21 period EMA or SMA	Short-term trend; popular for swing trading
50-day SMA	Medium-term trend
200-day SMA	Long-term trend; one of the most-watched levels in all markets
200-week SMA	A long-term Bitcoin reference that has historically been near cycle lows

Because crypto trades seven days a week, a 200-day moving average in crypto covers about 200 calendar days, while in stocks it covers about 200 trading days, roughly 40 weeks. The numbers are the same, but the time periods differ. Many crypto traders simply use the same periods as stock traders, because so many others do.

8.5 Reading moving averages

Direction. A rising moving average suggests an uptrend; a falling one suggests a downtrend; a flat one suggests a range.

Price position. Price above a rising moving average is generally bullish. Price below a falling one is generally bearish. Many traders use the 200-day SMA as a simple dividing line between bull and bear conditions.

Dynamic support and resistance. In a strong uptrend, pullbacks often stop near a rising moving average like the 20 EMA or 50 SMA, which acts as moving support. In downtrends, rallies often stall near falling moving averages.

Distance. When price stretches far above a moving average, it's often overextended and may pull back. When far below, it may bounce.

8.6 Crossovers

A crossover happens when a shorter moving average crosses a longer one.

Crossover	Definition	Popular interpretation
Golden cross	50-day SMA crosses above the 200-day SMA	Long-term trend turning bullish
Death cross	50-day SMA crosses below the 200-day SMA	Long-term trend turning bearish
Short-term crossovers	For example, 9 EMA crossing the 21 EMA	Shorter-term momentum shifts

Golden and death crosses get a lot of media attention. In practice, they're lagging signals. Because they're based on averages of past prices, by the time a crossover happens, much of the move has often already occurred. They're better at confirming a trend that has already started than at predicting one.

Chapter 8 · Golden cross and death cross

A price line falls, turns up at a low, rallies, then turns down at a high. A fast moving average (for example the 50-day SMA) follows price closely and a slower dashed moving average (for example the 200-day SMA) trails behind. Well after the low, the fast average crosses above the slow one, marked golden cross; well after the high, it crosses below, marked death cross. Arrows labelled lag show the gap between each price turn and its crossover.

"So they're late," said Node.

"Always," said Hash. "Every moving average is late. That's the price of smoothing out noise."

8.7 Where moving averages fail

Moving averages work well in trending markets. In ranges, they fail repeatedly.

When price moves sideways, it crosses back and forth over the moving average, and short-term crossovers happen again and again in both directions. Traders following each signal lose money on every small move. This is called whipsaw.

Market condition	Moving average performance
Strong trend	Good: clear direction, useful dynamic support or resistance
Choppy range	Poor: frequent false crossovers and whipsaws
Sudden reversal	Poor: slow to react, signals arrive late

One way to tell if you're in a range: the moving average is flat, and price keeps crossing it. That's a cue to rely on support and resistance instead.

8.8 A simple framework

Hash showed Mint a simple way to use moving averages without overcomplicating things:

1. Use the 200-day SMA to judge the big picture. Above it and rising: favour long positions. Below it and falling: be cautious.
2. Use the 50-day SMA for the medium-term trend.
3. In an uptrend, look for pullbacks to the 20 EMA or 50 SMA as potential entries, combined with support levels and candlestick signals.
4. Ignore crossovers when the moving averages are flat and tangled together.

8.9 Try it yourself

Add the 20 EMA, 50 SMA, and 200 SMA to a daily Bitcoin chart. Identify periods when price respected the 50 SMA as support during an uptrend. Then find a period of range-bound trading and count how many times price crossed the 20 EMA. Finally, find the last golden cross and death cross, and note where price was relative to its eventual high or low.

Key takeaways from this chapter

1. Moving averages smooth price data to make trends easier to see.
2. Simple moving averages weight all periods equally; exponential moving averages react faster to recent prices.
3. The 20, 50, and 200 periods are the most widely watched, with the 200-day as a common bull-bear dividing line.
4. Moving averages show trend direction and often act as dynamic support or resistance.
5. Golden and death crosses are lagging signals, better at confirming trends than predicting them.
6. Moving averages work well in trends and fail in ranges, where whipsaws are common.
7. Every moving average is late; that's the trade-off for reducing noise.