Trading Guide for Cryptocurrency: 7 Intermediate Technical Analysis Strategies | Moving Average and Price Momentum

This article, the fourth in our investing and trading series, focuses on short-term crypto investing using intermediate technical analysis. We’ll cover strategies that involve moving averages and momentum indicators. Remember that while technical analysis can seem clear after the fact, it often gives false signals. To improve accuracy, confirm each signal with multiple indicators and other types of analysis.

 

1. Key concepts

Moving Average is a technical analysis tool that smooths out crypto prices by creating a constantly updated average price. It’s calculated over a specific time, like 10, 50, or 200 periods, and helps traders identify trends by filtering out short-term fluctuations. The two most common types are:

• Simple Moving Average (SMA): The average price over a specific period.
• Exponential Moving Average (EMA): Gives more weight to recent prices, making it more sensitive to recent price movements.

Price Momentum measures the speed or rate of change in price movements. They help traders understand the strength of a trend and identify potential reversals.

The moving average is useful for visualizing when a price trend deviates from its average. At that point, two scenarios can happen: either the price trend remains strong and the moving average line eventually follows, or the price trend reverses toward the moving average line. You can predict each scenario’s likelihood by examining the Price Momentum. If the momentum is strong, the trend is likely to continue. If the momentum is weak, the trend may be nearing its end.

2. Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a momentum oscillator that evaluates the speed and scale of price changes. The RSI compares the relative strength of average up and down price movements during the last 14 periods (the default duration, but you can customize that on our Tokenize Xchange BTC/SGD price chart).

The RSI is calculated by taking the moving average of the latest 14 average gains and 14 average losses:

As a rule of thumb, an RSI value above 70 suggests an overbought zone, so the price is likely to return to the average, thus a sell signal. Conversely, an RSI value below 30 suggests an oversold zone, so the price is likely to move up to the average, thus a buy signal.

In a different market condition, high RSI values may suggest a bullish trend, thus a buy-and-hold signal, while low RSI values may suggest a bearish trend, thus a sell signal. Another use case for RSI is to visualize when the price trend is different from the momentum trend, which would suggest an imminent trend reversal, more about that in the ‘Bullish and Bearish divergences tactic’ section.

In conclusion, RSI is best used with other indications to predict price movements.

3. Stochastic Oscillator

The Stochastic Oscillator (SO) is a momentum indicator that compares the current price point to its highest and lowest points of the last 14 periods. It’s referred to as the %K line or the fast Stochastic indicator. Often, it’s accompanied by the slow Stochastic indicator, or the %D line, which is a 3-period-moving-average of %K.

SO’s usage is similar to RSI: a high SO value above 80 suggests an overbought zone, so the price is likely to return to the average, thus a sell signal. Conversely, a low SO value below 20 suggests an oversold zone, so the price is likely to move up to the average, thus a buy signal. In a different market condition, high RSI values may suggest a bullish trend, thus a buy-and-hold signal, while low RSI values may suggest a bearish trend, thus a sell signal.

Comparison between Relative Strenght Index and Stochastic Oscillator:

	Relative Strength Index	Stochastic Oscillator
Calculation	The relative strength of average price increase and decrease	Close price relative to its price range
Threshold	70 and 30	80 and 20
Sensitivity	More sensitive to short-term price moments	More representative of the long-term trend
Time frame	Better during market movements	Better during a consolidation
Usage	Confirm trend Identify Oversold and overbought	Identify trend reversals Gauge momentum of price movement Identify Oversold and overbought

4. On-balance-volume

On-balance-volume (OBV) is a cumulative indicator that assesses trading pressure by adding the trade volume of up days and subtracting the trade volume of down days. OBV offers insights into whether buying or selling pressure is dominating the market.

• If the current closing price > previous closing price:​

• If the current closing price < previous closing price:​

• If the current closing price = previous closing price:

Example ETH On-balance-volume

Day	ETH Closing Price	Volume	OBV
1	$2900	1500	0
2	$3101	1800	1800
3	$3600	1600	200
4	$3700	2000	2200

Note that OBV doesn’t take into account the precise price movement. No matter if the price increases by 0.1% or 10%, it adds volume the same.

When the price trend and OBV trend agree, it suggests that the current trend is likely to continue. Conversely, if the trends diverge, it signals a potential reversal in the price trend. As a result, OBV is commonly used to confirm the strength of price trends.

5. Bullish and Bearish divergences tactic

Divergences happen when the price line and a companion momentum indicator (commonly RSI) show opposite trends, signaling a potential price trend reversal.

Bullish divergence is when the price trend is bearish, but the RSI shows a bullish trend, signaling that the price is likely to rise. Conversely, Bearish divergence is when the price trend is bullish, but the RSI shows a bearish trend, signaling that the price is likely to drop.

6. Double Moving Averages Crossover (DMAC) tactic

Long-term SMAs (typically 200 periods) can represent price trends well, but can’t reflect the recent price movements. To address this, traders incorporate a short-term SMA, typically with a shorter period length (typically 50 periods).

The Double Moving Averages Crossover tactic involves monitoring the intersection of the short SMA with the long SMA. When the short SMA crosses above the long SMA, it suggests a bullish price movement. Conversely, when the short SMA crosses below the long SMA, it suggests a bearish trend.

However, you should remember that moving average is a lagging indicator, it may not predict current price movements accurately. By the time you confirm price movement by MAs, the price already moved.

7. Moving Average Convergence & Divergence (MACD) tactic

The MACD line is formed by subtracting the 26-period EMA of price from the 12-period EMA of price. Additionally, a signal line is generated by applying a 9-period EMA to the MACD line. A histogram is then created by calculating the difference between the MACD line and the signal line. MACD accounts for both price trends and recent movements and reflects price movement even better with low-period EMAs.

MACD often shows these signals:

• Buy signals are generated when the MACD line crosses above the signal line, while sell signals occur when the MACD line crosses below the signal line.
• Rapid drops in the MACD line indicate oversold conditions, suggesting a potential buying opportunity, while rapid climbs suggest overbought conditions, indicating a potential selling opportunity as the price is expected to revert to the mean.
• The divergence between the MACD line and the price trend suggests that the current trend may be approaching its end.
• Histogram peaks suggest increasing momentum, while troughs suggest decreasing momentum, which are useful to gauge the strength of the current trend and to anticipate reversals.

8. Aroon Indicators

The Aroon Indicator System consists of 2 primary components: Aroon Up and Aroon Down. They measure how recently the highest and lowest prices over the last 25 periods occurred.

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H25 = Highest price of the last 25 periods

L25 = Highest price of the lowest 25 periods

Since the Aroon system only takes into account the peaks and bottoms of the price line, it’s not sensitive to minor price fluctuations. Instead, it primarily highlights trends, their strength, and potential reversals.

When the Aroon Up line surpasses the Aroon Down line, indicating increasing upward momentum, and conversely for a downward signal. When both lines move in parallel, it suggests a sideways movement in price within a range.

Since most trading signals come from the relative position of the 2 lines, the Aroon Oscillator is made by subtracting Aroon Down from Aroon Up, offering a simplified view of the Aroon indications system.

Aroon Oscillator = Aroon Up − Aroon Down