Moving average in the field of finance — including cryptocurrencies — is a stock indicator commonly used by investors for technical analysis. Among the most important reasons for the calculation of a moving average is to mitigate the impact of sometimes random or short-term fluctuations in the prices of any stock — and cryptocurrencies are especially prone to extremes. The other reason, of course, is to constantly update the average price of a stock for a selected period of time. It is also referred to as a lagging indicator as it is based on the past prices of a given stock.
And just like it is used for any other stock, moving average also helps an investor analyse the trend of a cryptocurrency not just in the present but also the future by making use of the past prices. In simple words, it gives investors have a better picture of what they are going to make on their investments should they invest in a particular digital currency.
How to calculate a moving average for cryptocurrencies?
The method is fairly simple. It's the application that's more important. For example, if you want to calculate the five-day moving average for Dogecoin, this is how you do it:
The closing prices of Dogecoin in the last five days, let's say, were 10, 13, 14, 11, and 12, respectively. Now, add the prices for the last five days and divide the total by 5.
10+13+14+11+12 = 60/5. The answer is 12, which is the moving average of Dogecoin relative to the last five days.
Dogecoin price in India stood at Rs. 22.7 as of 3:30pm IST on September 3.
Importance of moving average in cryptocurrency investments
Experts say that when the prices of a stock are below a moving average, it's an indication to traders of a bearish trend, which means both price and sentiments are trending down. On the contrary, if the prices are above the moving average, it's a sign of a bullish trend. However, other indicators, including the relative strength index, should also back the moving averages.
Among other important functions, a moving average can also help gauge the momentum, which basically measures the rise or fall in the prices of a cryptocurrency. With the help of a moving average, one can attempt to forecast, if not accurately pick and predict, the trajectory of a cryptocurrency in the days to come. This helps an investor better decide if they are making a safe and sound investment.
As we explained before, the greater the number of days the bigger is the lag. The traders actually use these figures based on the number of days to decide on whether or not they should invest in a digital asset or a cryptocurrency token.
The other advantage, of course, for traders in terms of calculating a moving average is that they can customise the time period to check the average prices according to their own needs. Moving average for a smaller period is naturally more price-sensitive compared to an average calculated for a longer period of time.
Remember, the moving average is only an indication of the trend and not a tool that sets the trend. You only get a picture of how a cryptocurrency token has performed relative to the number of days you pick to find the moving average. Cryptocurrency is deemed to be a relatively riskier asset class and the golden rule, as experts say, is to not invest more than you can afford to lose.