The following is a great tactic I use to help determine buying or selling actions. It’s basic, but very effective…especially for swing trading. I find it works best on the 4 hour chart.
This method uses exponential moving averages (EMA’s). If you’re unfamiliar with this indicator, it basically represents the average price for a given period of time. In this case, we’re using the 8, 21 and 55 day EMA’s on a 4 hour Bitcoin chart. These moving averages can be used to signal a trend reversal. When the 8 day EMA is on top, the 21 day EMA is in the middle and the 55 day EMA is on the bottom, it's a good sign of an overall uptrend. Conversely when the 8 day EMA is on the bottom, the 21 day EMA is in the middle and the 55 day EMA is on top, that's a sign of a downtrend.
In these examples, the 8 day EMA is in blue, the 21 day EMA is in yellow and the 55 day EMA is in pink. As soon as the 8 day EMA crosses the 55 day EMA, you can expect a trend reversal. In this example, you’ll see a reversal from an uptrend to a downtrend:
Here is an example of a downtrend reversing to an uptrend:
Ever wondered if you should buy a dip, but are timid because you’re afraid it might be a trend change rather than just a temporary drop? This tactic helps you get a better idea of wether the drop is temporary or may continue into a downtrend. As long as the 8 day EMA remains on top of the 21 and 55, you can generally consider it a healthy dip to buy.
As soon as the 8 day EMA crosses the 55 day EMA, expect a trend reversal. In other words, sell. This is also a great indicator to use when entering a short position.
To illustrate how simple this method is, here’s a chart showing you when to buy and when to sell. You can see if you followed this simple method, you’d have made a great return on your investment.
Remember, this method is most effective on the 4 hours chart. I find it’s not nearly as accurate on lower or higher time frames. Also keep in mind there are always exceptions to this strategy. It's not guaranteed to work, rather just a good method that's effective more often than not.
That’s it folks. A very simple, straight forward method to add to your trading arsenal. I hope it helps!
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Disclaimer: I am NOT a financial advisor and this is NOT financial advice. Please always do your own research and invest responsibly.
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