How to Use Moving Average Patterns - Moving Average Bonding, Convergence and Divergence

What is moving average bonding, convergence, and divergence?

• MA bonding

The term ‘moving average bonding’ refers to a scenario where multiple moving averages overlap each other after a prolonged period of sideways movement in the currency price. This pattern can occur at any stage of a market trend and is frequently seen during the bottoming, adjusting, peaking, and declining phases of currency price movements.

• MA convergence

Moving average convergence refers to when scattered MAs are gradually getting closer to each other. The alignment of the average cost in different moving average terms can be indicated by the bonding pattern.

In general, the convergence of moving averages leads to bonding, and afterwards, the price will move in a particular direction to end the bonding state. The direction of the price movement will determine the market trend. If the price continues to move in the same direction as before the convergence, the original trend will persist, otherwise it will reverse. After the bonding pattern breaks down, divergence between moving averages is often observed.

How to Identify MA bonding, convergence, and divergence?

• MA bonding
  1. Following a prolonged period of sideways movement in the coin price, the medium-term, short-term, and even long-term moving averages gradually converge and eventually become intertwined
  2. Currency price and Candlestick charts turn into the shape of a rectangular, wedge, or triangular;
  3. This usually happens after a noticeable period of a bull or bear trend.
• MA convergence
  1. Can be found in both upward and downward trends;
  2. The Candlestick charts and moving averages with different time frames, which were initially dispersed, are slowly converging towards each other.
• MA divergence
  1. Can be found in both uptrends and downtrends. Divergence in an upward trend is often a bullish divergence; but, if the divergence happens when the market is in a bear trend, it is a bearish divergence;
  2. MAs of different time frames depart from their bonded state, progressively separating from one another, and diverging in the same direction.

Implications

• MA Bonding

  1. In the case of MA bonding, if medium-term and long-term moving averages (MAs) are mostly above the short-term MA, preventing the currency prices from falling, a bear market is likely to occur. Traders should sell to close their positions after the coin price drops below the bonding level.
  2. A bull market is likely to develop if the medium-term and long-term moving averages (MAs) are mostly below the short-term MA for the majority of the time when the MAs are intertwined. This indicates upward movement of the currency price. Traders are advised to start investing in assets once the currency price rises above the bonding level.
  3. After the MA bonding forms and the medium- and long-term moving averages (MAs) level out, while the short-term MA oscillates around them, the coin price can trend above or below the current entanglement with equal probability. Traders can determine whether to buy or sell their assets based on the direction in which the coin price moves to break the bonding. \

• MA convergence

  1. If the medium-term and long-term moving averages (MAs) increase before convergence and the trend continues after the pattern forms, a bull market is likely to occur.
  2. If the medium-term and long-term moving averages (MAs) go down before convergence and the trend continues after the pattern forms, a bear market is likely to occur.
• MA divergence
  1. The bullish divergence of the MA suggests users hold up to their investments.
  2. The bearish MA divergence is an important signal for shorting positions

Notes:

1. When MA divergence occurs, it indicates that traders in each MA cycle are becoming increasingly consistent in their assessments of the market outlook and behavior. If these assessments and behaviors remain unchanged, the trend will continue. This presents a good trading opportunity for traders, regardless of whether they choose to go long or short.

2. The MA divergence is part of the bullish and bearish MA array, and it will occur at the stage when the bullish or bearish trend is most oblivious ; \

3. The MA convergence means that some traders have changed their behaviors. But traders should determine on their own whether it is a trap that lures the market in the wrong direction.

Application

1. MA bonding

The above is the 4-hour chart of Gate.io BTC contract. BTC experiences a wave of rapid decline, falling from $39,000 to around $30,000, and then goes through one-month of sideways movement. Short-term, medium-term, and long-term moving averages, including MA5, MA30, MA60, MA120, and MA180 intertwine with each other. As BTC continues to fall to $17,000, the MAs break the bonding status and gradually diverge.

1. MA convergence

The above is the 4-hour chart of the Gate.io BTC contract. As BTC falls sharply from $21,500 to around $16,000, the short-term, medium-term, and long-term MAs, which previously aligned in divergent patterns, also gradually converge. Then, BTC starts fluctuating within a narrow range between $15,500 and $18,500.

1. MA divergence

The above is the 4-hour chart of the Gate.io BTC contract. As BTC keeps falling for a period of time and then starts to move sideways at $16,000, MA5, MA30, MA60, and MA120 are intertwined with each other. As the price of BTC gradually rises, the MA leaves the bonding area and starts to diverge. The short-term, medium-term, and long-term MAs are aligned from top to bottom and are pointing upward. BTC rises from $16,700 to $23,000, representing a cumulative increase of more than 35%.

Summary

MA bonding, convergence, and divergence are regular occurrences in market movement and each signals a critical moment of change in the market trend. Traders should first identify the market trend direction indicated by the signal, i.e. whether the initial trend will continue or reverse once the pattern appears. Using other technical analysis tools is recommended in these situations. Traders who make the correct decision and trade patiently will have a good chance of profiting.

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Disclaimer

Please note that this article is for informational purposes only and does not offer investment advice. Gate.io cannot be held responsible for any investment decisions made. The information related to technical analysis, market judgment, trading skills, and traders’ sharing should not be relied upon for investment purposes. Investing carries potential risks and uncertainties, and this article does not guarantee returns on any investment.