We have taken a look at the basics of price action, support and resistance, and also trendlines as part of technical analysis in cryptocurrencies. These tools are considered simple and another simple tool that is used by many beginner traders is moving averages.
A moving average is the average price of an asset over a certain period of time. There are two types of moving averages: Simple Moving Average (SMA) and Exponential Moving Average (EMA). We will look at SMA today and use it to analyze the price movement of Litecoin.
Simple Moving Average is obtained by calculating the average of the closing prices of an asset over a period of time. The closing prices are added together and then divided by the number of days in the time period.
For example, on the Litecoin daily chart on BigoMex, the closing prices for the last three days are $181, $182, and $186. The moving average is ($181 + $182 + $186)/3 or $183.
From this calculation, we can see that a moving average is a lagging indicator. It means that this analysis tool uses past and current prices to follow a trend. Therefore, it is more suitable for long term trades rather than short term ones.
The Most Used Moving Averages
Moving averages are used to smooth the price of an asset. The purpose is to reduce the influence of random or sudden fluctuations of price on the analysis of a trend. By looking at a smooth moving average, a trader can analyze without being disturbed by sudden wicks.
The most common moving averages are for periods of 15 days, 20 days, 30 days, 50 days, 100 days and 200 days. Traders often use more than one moving average on a chart. The longer periods are less sensitive to price changes, meaning that they follow prices more slowly compared to shorter periods.
The 50-day moving average and 200-days moving average are considered to be the most important. Traders can use shorter period moving averages for short-term trades or longer periods for long-term trades, but the 50-day and 200-day can give an overall analysis.
A moving average can be used as a support and resistance level on a chart. If the price of a crypto asset is above a moving average and then it moves down near it, then the moving average acts as a support. Vice versa, if the price is below a moving average, then the SMA becomes resistance.
SMA on Litecoin Daily Chart
Looking at the Litecoin daily chart, since November of last year, the price has been in a bullish trend. In these situations, a SMA can be a good point to buy or go long.
Beginning in January, the price of LTC touched the 50-SMA during late January, late February, late April, and late March. All of these price points proved to be a good entry to buy LTC or buy a long contract on BigoMex.
The price of Litecoin bounced upwards each time it touched the 50-SMA. However, in the middle of May it touched the 50-SMA then broke down beneath it. The 50-SMA became resistance and recently the LTC price is above it again.
Therefore, a possible plan moving forward would be to buy Litecoin after a confirmed bounce from the 50-SMA as a support level.
