How To Calculate The Moving Average In Cryptocurrency And Why Is It Important

How to Calculate the Moving Average in Cryptocurrency and Why Is It Important

In the field of finance — including cryptocurrencies — a moving average is a stock indicator that is frequently used by investors for technical analysis. One of the primary reasons for calculating a moving average is to mitigate the impact of occasionally random or short-term price fluctuations in any stock — and cryptocurrencies are particularly prone to extremes. Naturally, the other reason is to continuously update the average price of a stock over a specified period of time. It is also referred to as a lagging indicator due to the fact that it is based on a stock's historical prices.

And, just as with any other stock, moving averages assist investors in analyzing the trend of a cryptocurrency not only in the present but also in the future by utilizing historical prices. In simple terms, it provides investors with a more accurate picture of the return on their investment if they invest in a particular digital currency.

How to calculate a cryptocurrency moving average?

The procedure is quite straightforward. The application is more critical. For instance, if you want to calculate Dogecoin's five-day moving average, follow these steps:

Dogecoin's closing prices over the last five days were, roughly, 10, 13, 14, 11, and 12. Now add the prices for the previous five days and divide by five.

10 + 13 + 14 + 11 + 12 equals 60/5. The answer is 12, which is Dogecoin's five-day moving average.

Importance of moving average in cryptocurrency investments 

According to experts, when a stock's price falls below its moving average, it signals to traders the start of a bearish trend, which means both the price and sentiment are declining. On the other hand, if prices are higher than the moving average, this indicates a bullish trend. Other indicators, such as the relative strength index, should, however, support the moving averages.

Among other critical functions, a moving average can also be used to determine the momentum of a cryptocurrency, which is essentially a measure of the rise or fall in its price. Using a moving average, one can attempt to forecast, if not precisely pick and predict, the future trajectory of a cryptocurrency. This enables an investor to determine more accurately whether they are making a safe and sound investment.

As previously stated, the greater the number of days, the greater the lag. Traders actually use these figures to determine whether or not to invest in a digital asset or a cryptocurrency token.

Naturally, the other advantage for traders in terms of calculating a moving average is that they can tailor the time period used to check average prices to their specific needs. A moving average calculated over a shorter period of time is by definition more price sensitive than an average calculated over a longer period of time.

Bear in mind that the moving average is merely an indicator of the trend, not a tool that establishes the trend. You only get a snapshot of how a cryptocurrency token has performed in relation to the number of days chosen for the moving average calculation. Cryptocurrency is considered a riskier asset class, and experts advise investors not to invest more than they can afford to lose.