Market Reversals With Moving Averages

Transforming Classic Technical Indicators Into Modern Tools

Moving averages are a staple in technical analysis, which is basically about studying past market data to predict future price movements. Moving averages smooth out price data to help identify trends over time. This article presents moving averages and a way to use them to identify the end of a trend instead of confirming it.

A Quick Introduction to Moving Averages in Technical Analysis

Here’s how moving averages work, imagine you’re tracking the price of a stock over the past 50 days. Instead of just looking at each day’s price, you calculate the average price over those 50 days. As each new day’s data comes in, you drop the oldest day’s price from the calculation and add the newest one. This moving average gives you a clearer picture of the overall trend.

Traders use moving averages in various ways. For example, when the current price crosses above its moving average, it might signal an uptrend, while a cross below could indicate a downtrend. Some traders also use multiple moving averages of different lengths to spot trend changes more reliably.

The following chart shows a 200-day moving average applied on the daily values of BTCUSD: