The MA 1000: Regression to the Mean and What it Means for BTC

TLDR at the bottom

​

Hi all this is my first TA post and I'm going to take a different approach from my usual shitposting and actually contribute something meaningful to this sub. This post is going to walk you through the Moving Average of 1000 days , regression to the mean, as well as both historical data and present day data. This isn't definitive and like in all statistics or journal publications that use statistics, past data is not a reflection of future outcomes. Replication of results doesn't always happen in the sciences, and I'd like to especially emphasize that it doesn't always happen in the trading world. Especially when we'll be comparing across trading worlds (traditional stock market to Crypto). In other words, this is not financial advice but more of a fun overview and as well as fun predictions using the available data. I'll try to keep it as simple as I can and cite sources where appropriate.

​

First things first lets get some definitions and concepts out of the way, as well as preemptively answer any questions you may have:

​

• The Moving Average: The MA is a stock indicator commonly used in technical analysis, used to help smooth out price data by creating a constantly updated average price. The number that follows MA denotes how many days is being used to calculate the average at any point where the line appears. MAs may be plotted on either daily or weekly charts, and depending on the MA you use you may get different stories. For the purposes of this writeup, we'll be using the MA 1000

​

• In our TA we are going to be focusing on 3 trend lines. The MA 50, 200, and 1000. The MA 50 and 200 are well established trendlines in the world of trading, and we can use them so see certain patterns such golden and death crosses. If in the instance that the 50 day MA crosses the 200 in an upwards direction that is called a golden cross and usually signifies the start of a bull run or market. The opposite is true for when the MA 50 crosses the MA 200 in a downwards direction. This is called a death cross and usually signifies the end of a bull run market. We'll be seeing these pop up in the charts, though the main thing to pay attention to here is the MA 1000.

◦ MA 50 in red

◦ MA 200 in yellow

◦ MA 1000 in blue

• So why are we using the MA 1000? This is where regression to the mean comes in. The MA 1000 is not commonly talked about but is an important trendline to consider in the greater picture of things. It rarely comes up because it rarely needs to be brought up. You can think of the MA 1000 as not "the" baseline but a baseline. Also, the more data points you have to inform a mean/average, the more reliable you can consider it. You may then ask why not the MA 2000? The reason is because you have to stop at a certain point, you simply can't collect all the data available. There is also the central limit theorem which you can test here. Basically, at a certain point things will revolve around the mean and rarely deviate too far from it for too long. For our purposes, we can think of the MA 1000 as an approximate of the mean.
• Regression to the mean: In statistics, regression to the mean is when extreme events often regress back to the average. In trading, this is often called a correction. What we're going to see are not only corrections, but also over-corrections.
• Why use traditional stocks to compare price movement in crypto? The reason boils down to data. There is simply more data to rely on in traditional stocks that spans over a long period of time than there is in crypto. for this writeup, I'll be using the Dow Jones Industrial Average as it has a wealth of data to examine and rely on. An MA 1000 is simply not available for BTC on the weekly chart, it is however available on the daily chart. We will see similar price movement patterns play out across these 2 charts. Also, if we can understand how the mean plays a role in 1 popular asset class, it can be used to understand how it might play a role in another asset class.

​

Ok so lets get on with the TA. The MA 1000 is the mean, and everything revolves around it. Prices are attracted to the mean like a magnet. However that doesn't mean that prices will stick to the mean. Also, we rarely cross too far below the mean in the case of the MA 1000. In the picture below, we can see that over a long period of time, the price reverts back to the mean and then bounces off. This is however not true when it is a time of crises. When crises hit, we go below the MA 1000. On daily chart, you can see that the price dips below the MA 1000 during the 2008 housing crash, as well when covid and lockdowns hit. However they recovered quickly after that point.

​

Daily Chart for DJI - Present Day

https://preview.redd.it/w8q259gzv0ka1.png?2444&format=png&auto=webp&s=c64ddfcafba6cf9fd807aa5bbbab1b84df4f0493

​

On the weekly chart however, we can see that the MA 1000 acts as the bottom for the 2008 housing crash, and the covid crash doesn't touch the MA 1000

Weekly Chart for DJI - Present Day

https://preview.redd.it/88aadph0x0ka1.png?1501&format=png&auto=webp&s=cdbd22ac5e14b6b0c3e57de56a5449f27ff3a25b

Lets take a look at another crises: The Great Depression

​

On the daily chart we can see that in the beginning of the crash, the MA 1000 acts as baseline where prices bounced off the MA 1000. However, it does eventually cross below. In this case it stayed below the MA 1000 for approximately 4 years, and then oscillates along that line until the end of WW2.

​

Daily DJI - Great Depression

https://preview.redd.it/hzexca0my0ka1.png?2598&format=png&auto=webp&s=e693b4a0e7d8d2bddf6fc628dab944748bb9d187

​

On the weekly chart we can see that the great depression does indeed cross the MA 1000 however remains there for a longer period of time (about 5 years). However, we are again seeing it oscillate along the MA 1000 line.

​

Weekly DJI - Great Depression

https://preview.redd.it/9il5e7doy0ka1.png?1509&format=png&auto=webp&s=c811447037dc0daeb2d43f3fca1b5ae0255771fd

What this is all coming together to say is that prices don't like to deviate from the mean too much without correcting (or overcorrecting [going below MA 1000]) for it. This also relies on the assumption that the economic environment can support drastic deviations from the mean for sustained periods of time (see prices skyrocket once WW2 ends into economic prosperity).

​

Ok that was a lot of justification for the use of the MA 1000 in both good economic times as well as economic crises. So what is this doing on a cryptocurrency sub? Lets have a look at BTC's MA 1000 on the daily chart.

What we can see is that we are currently well below the MA 1000 on the daily chart. Assuming the past data indicates that prices do not like to deviate too far from the mean for too long, it may be said that we are indeed regressing back to the mean.

​

Daily BTC - Present Day (no sh!t)

https://preview.redd.it/rvnoqor231ka1.png?1516&format=png&auto=webp&s=998ae499d853abc41921404e8027b221508035b1

​

Unfortunately the MA 1000 is not available for BTC's weekly chart (yet). So for the time being this means that we do not know where BTC's mean when considering the weekly chart.

​

Note: This does not mean this is the beginning of a bull market. This means that we are correcting for an overcorrection. We will likely go on a bull rally as we regress back to the mean, however that does mean it is the start of a bull market (rallies ≠ market).

​

Ok that was a lot. Here is the conclusion/TLDR;

The MA 1000 is a good indicator for the mean. When prices deviate too far from it they like to regress back towards it. This is especially true in times of economic crises, though different lenses need to be applied for different levels of magnitude/severity of the crises. When things are bad, use the MA 1000 on the daily chart. When things are really bad, use the MA 1000 on the weekly chart. BTC is showing signs of regressing back towards the mean. It may do so through a bull rally, but that not mean we are in a bull market.