Trading cryptocurrencies has gained large popularity over the years, establishing a trillion dollar market of its own. The majority of investors typically hold Bitcoin and other cryptocurrencies for extended periods of time in the hopes that their investments will provide them with large profits. However, due to increased demand, more and more investors around the world are devoting time, effort and money to the endeavor of turning a profit from cryptocurrency trading.
The creation of a trading strategy and a manual on how to invest in cryptocurrencies are both essential resources for beginner and advanced crypto traders. The most used and effective trading indicators for crypto trading, crypto signals, and technical analysis will all be covered in this article.
Technical analysis for cryptocurrencies is an essential instrument that gives traders the ability to outperform the market, in addition to analyzing markets from a macroeconomic viewpoint and researching whether projects are worthwhile to invest in.
Additionally, technical analysis examines chart patterns and forecasts future trends using indicators based on historical price action data. Technical analysis can often utilize mathematical calculations based on the price or volume of an asset to forecast future prices. The results might reveal a market trend or serve as indicators that the current trend is likely to change direction.
No single sign can identify a market turn or validate a trend. The best approach is to mix indicators, or better yet, select the most important tools that we will cover in this article to provide the trader with a clearer and more informed trading decision.
We will go through some of the most widely used research and investment tools for crypto traders. This is not, however, a comprehensive list of all available materials. Traders can continue to learn and comprehend the various applications of additional technical analysis tools as they get more experience.
It is important to note that a thoughtful trader should try to learn how to keep emotions out of the trading process. To prevent some common mistakes and increase the value of an investment, a trader’s confidence and general experience may be enhanced by knowing which tools are readily accessible and how to use them.
Some Readily Accessible Crypto Indicators
Moving Average Indicator (MA)
One of the simplest instruments used in technical analysis is the moving average technical indicators. They represent the mean price of an asset over a given time frame. They show whether an asset is trending positively (bullishly) or negatively (bearishly), depending on the situation.
Because they follow the trend and give delayed input after the price movement has already taken place, they are also known as lagging indicators. The two moving averages that are most widely employed in cryptocurrency are the simple and exponential moving averages.
The simple moving average (SMA) is useful for long-term traders because it catches trends that do not quickly change direction. The exponential moving average (EMA), on the other hand, is more suited for short-term traders since it swiftly captures price changes and gives current price data greater importance.
Any timescale can be used when using moving averages. However, 200, 50, and 20-period moving averages are the most popular since they let traders help determine the asset’s general direction based on the period that they have selected.
The 200-period SMA
The 200 SMA is the average closing price of a cryptocurrency asset over the previous 200 days, calculated by first averaging the closing prices and then dividing the result by 200. It is designed for long-term traders who wish to spot uptrends or downtrends, as well as receive a clear picture of support levels and resistance levels.
As a general rule, the trend positive and bullish if the asset price is above the 200 moving average, and in contrast the trend is negative and bearish if it is below.
The 50-period SMA
The 50 SMA identifies the average price buyers have paid for a cryptocurrency over the previous 10 trading weeks. Technical cryptocurrency traders frequently utilize this indicator as it helps find support during an uptrend and resistance during a decline.
Furthermore, the 200 and 50-period SMA both showcase Death and Golden Crosses. A Death Cross is a sign that a bear market is about to begin if the 50 SMA is crossing the 200 SMA from up to down. In contrast, a Golden Cross—which may be a sign of an impending bullish market—occurs when the 50 SMA crosses the 200 SMA from a downtrend to an uptrend.
The 20-period SMA
The 20-period simple moving average is a shorter time frame more useful to day-traders. It calculates the average price of a crypto asset over the last 20 daily candles.
It allows traders to efficiently react swifter to price changes in the market as it detects the low points of buildups before the actual breakout. This short-term movements however, could be a false alarm capturing traders into bull or bear traps.
One of the most widely utilized tools by cryptocurrency traders is the moving average convergence divergence indicator (or oscillator), which is a useful buying or selling simple momentum indicator.
To briefly explain it, when the MACD diverges, the two underlying moving averages are moving apart, and when it converges, they are moving in the same direction.
How does the MACD indicator work?
It is regarded as a trend-following momentum indicator, which means that it will provide signals for both a trend and momentum. It is intended to show alterations in the strength, direction, momentum, and length of a trend in the price of a cryptocurrency.
The difference between a short term and a long term period of exponential moving averages is the MACD indicator. In crypto, the 12 and 26-period EMAs are frequently taken into account. The MACD line, which can provide exciting buy or sell indications, is the result of those calculations.
It is a good opportunity to buy if the MACD is positive and above 0, which suggests an upward (bullish) momentum. in contrast, it is a good opportunity to sell when it is negative and below zero, which indicates a downward (bearish) momentum.
MACD can be also very useful when trying to determine how strong the current trend is. For instance, here is a considerable likelihood that the markets will soon enter a downtrend if the chart shows higher highs but the MACD shows lower highs. This is because the price is rising but the momentum is waning.
Another valuable parameter like the MACD is the RSI indicator, which are often used in conjunction with one another.
Technical traders can study the price charts of an asset using the MACD and the RSI to look for patterns that indicate when to purchase or sell the cryptocurrency. The RSI assesses a cryptocurrency’s strength or weakness based on recent price fluctuations to identify overbought or oversold circumstances for an asset, as well as detect potential trend reversal momentum.
The technical analysis indicator RSI has a scale from 0 to 100, where oversold territory begins below 30 and levels above 70 are assumed to be overbought.
Named after John Bollinger, the creator of Bollinger Bands, the technical indicator identifies the price and volatility of a crypto asset over time. This indicator consists of three main components – a simple moving average, an upper band, and a lower band, usually two standard deviations away from the SMA. The standard deviation calculates the difference between the value/price from the average one.
For instance, the standard deviation will provide a low value that implies minimal volatility if prices are in a small trading range (short-term consolidation), making it an excellent indicator of volatility. The positive standard deviation is represented by the upper Bollinger band. This region suggests that the price is too high and the asset may be overbought.
The negative standard deviation is represented by the lower Bollinger band. This region suggests that the price of the assets is too low and hence may be oversold. As the bands widen, it is clear that the market is becoming more erratic as prices diverge from the trailing 20 MA. The market may become less volatile as bands close.
Do Technical Indicators Work for Crypto?
In conventional markets, traders can trust technical analysis techniques, like those mentioned above, to predict an asset’s future price movement based on historical market data. However, the cryptocurrency market is still a relatively young asset class with little history of past market data, making forecasts more challenging to assess. Moreover, the crypto market’s high volatility makes forecasting rather difficult to foresee.
Some indicators work better for crypto volatility, such as the momentum indicator On-Balance-Volume (OBV) which forecasts breakout directions in price. It can also help to track the flow of funds from influential market players and institutional investors. In essence, it measures the crypto buying and selling pressure. In the cryptocurrency industry, several forms of indications are taken into account, particularly in the era of intense social media activity and online marketing techniques.
These social indicators seem to be especially helpful for lower market cap cryptocurrencies, which may see larger price swings if a well-known influencer or celebrity makes a mention of or publicly praises the project. Understanding how the new generation of traders convey market mood has become important in addition to traditional indicators like price and trading volume. Google search volume and Twitter activity can be excellent indicators of upcoming price changes.
Let’s face it, trading any market can often be a difficult and risky endeavor. This is especially true for the crypto market. Day traders, swing traders and long-term investors need all the useful information and tools they can get. Glassnode, the crypto industry’s leading blockchain data and intelligence platform, equips investors and traders with the most comprehensive on-chain metrics, charts and alerts to help them make better investment and trading decisions.