How to use technical indicators in cryptocurrency trading?

There’s much to gain and lose in the volatile cryptocurrency market, and this guide to understanding technical indicators will help you make better decisions.

Description: No matter if you are a new or experienced trader, the article should help you define the best indicators for cryptocurrency trading. Check out the best 5 tools to earn more profits in trading.

Successful trading on the cryptocurrency market without the help of technical indicators is rarely possible. You can find them built into most large crypto exchanges, but their application often confuses the novice one. It is not difficult to understand indicators: it is enough to understand what indicator reflects and what is needed for it. Having understood the purpose of at least the key indicator, the trader will be able to conclude the main part of his deals consciously, and understanding the purpose of each deal is the basis for successful trading. Let’s find out what technical indicators are like!

What is technical indicator in trading?

If you look at the crypto market strictly mathematically, you can see that it consists mainly of a number of variables. They are the current price, the price at another selected moment in the past, the number and size of deals, and so on.

In fact, a market consists of interacting numbers, and this interaction determines the current price of an asset. When analyzing these figures in detail, respectively, we can predict what will happen to the price at least in the near future.

An ordinary person cannot track, hold and calculate all the mathematical data provided by the market, because there is too many of it and it changes very quickly. Getting some data at one time, and other — after a few minutes, the accuracy of the forecast will be broken. In order to be able to make a prediction in this environment technical indicators have been invented.

A technical indicator is a graphical representation of a certain formula or function. Naturally, it is impossible to fit all figures and all variables into one chart, that’s why there are a lot of indicators. As a rule, no trader uses all of them: many of them almost duplicate each other, the variables repeat themselves, and the result is charts reflecting almost the same part of the market picture.

Therefore, each market participant chooses the indicators that are most understandable to him among the analogues, do not duplicate each other, use the maximum number of the most important variables and, thus, cover most of the picture.

Over time, a number of indicators have been formed, which use the largest number of traders due to their convenience, comprehensibility and comprehensiveness as compared to others. These are the key technical indicators in trading.

Can indicators predict the future with a 100% accuracy?

No, indicators can’t predict the future with much accuracy. However, they can help a trader to observe trends to assess their direction and strength. The logic of indicators is similar to Newton’s physics: price movements have an impulse and the bigger they are, the harder it is to stop them (inertia); and vice versa. This concept is reflected in a well-known saying: “Trend is your friend”.

Imagine that there are 21 days left until Christmas, and in one of the stores a fashionable toy appeared, sales of which on the same day reached 20 000 pieces. The next day 25 000 toys were sold in the same store, and the third day 30 000 toys were sold. If you are the owner of another store and also want to buy such toys for sale, then before Christmas you still have the opportunity to reach some desired sales volume. But, if at some point you saw that sales of your neighbors fell from 30 000 toys to 15 000, or even 5000 a day, then you will think carefully before you buy more such toys.

Even if you can predict that your store will make very successful sales before the holiday, you will not be able to repeat exactly the sales volume of 20 000, 25 000 and 30 000 toys per day as your neighbors have managed.

Indicators use formulas and charts to help traders “see” the future possible behavior of buyers, sellers and prices. However, they are not able to provide you with “future prices” calculated with great precision at a given time or period.

Top 5 technical indicators for cryptocurrency traders

Ichimoku cloud

This indicator is very good for determining the support/resistance levels and trend direction. It was invented by journalist and financial analyst Goichi Hosoda and presented to the public in 1969. At first glance, the indicator looks quite complicated and confusing, but its practical application is quite simple and useful.

Ichimoku cloud consists of 5 lines:

• Tenkan-sen: shows the average price value for the first time period, defined as the sum of maximum and minimum for that time, divided by two;
• Kijun-sen: shows the average price for the second time period;
• Senkou Span A: shows the middle of the distance between the previous two lines, shifted forward by the value of the second time interval;
• Senkou Span B: shows the average price value for the third time interval shifted forward by the value of the second time interval;
• Chinkou Span: shows the closing price of the current chart candle, shifted backwards by the value of the second time interval.

The distance between the Senkou lines is Ichimoku cloud. If the price is between these lines, the market is considered non-trendy and the edges of the cloud form then the support and resistance levels. This case is good for margin or spot trading. That is you can trade inside the cloud both long and short, just do not forget about stop orders.

If the price is above the cloud, then its upper line forms the first support level and the second forms the next support level. That is, from the upper line you (always!) can expect to enter the long position (on rebound). Don’t forget about stop-loss orders, as there are could be breakdowns and steep drops in price.

Relative Strenght Index (RSI)

Relative Strength Index (RSI) is a technical analysis tool that is used to measure the strength of dynamics and price trend of an asset/market in order to determine whether an asset is overbought or oversold. The RSI is an oscillator that fluctuates between 0 and 100.

Note the “neutral level” at 50: traders often use it as a line separating the chart into bearish and bullish areas. If the RSI is above 50, then traders consider the trend as upward. If the RSI is below 50, then traders consider the momentum to be bearish. But in practice traders went further: they concluded that if RSI is above 70, the asset potentially becomes overbought. Conversely, if the RSI is below 30, then the trend is not just bearish, and the asset can be oversold.

The Relative Strength Index (RSI) is calculated by a formula:

RSI = 100 — [100/(1+(average price increase/average price decrease))]

RSI was developed by mathematician and trader Wells Wilder. Wilder traded stocks and commodities and faced a common problem regarding the timing of entry and exit. In solving this problem, the mathematician has developed a formula that allows traders to better determine entry/exit points for long or short positions.

The RSI indicator estimates the ratio of price changes between candlesticks during the last X periods (where “X” is a parameter defined by a trader, usually the number 14 is used). The RSI captures price changes relative to previous candlesticks to determine “trend strength”.

Moving average (MA)

Moving average (MA) is a useful tool for tracking the direction and strength of a trend, taking into account specific price data for a certain period of time (determined by the timeframe you are considering) in order to continuously update and refresh the price average as it moves along the chart.

There are different types of moving averages that can be used by traders not only for day trading and trading on fluctuations, but also for long-term settings. Despite the different types, MAs are most often divided into two separate categories: simple moving averages (SMAs) and exponential moving averages (EMAs). Depending on the market and the desired result, traders can choose which indicator is appropriate and will benefit from its setting.

SMA takes the data for a certain period of time and shows the average price of this asset for the data set. The difference between the SMA and the base price average in the past prices is that the SMA ignores the oldest dataset as soon as a new dataset is entered. Thus, if a simple moving average calculates an average based on 10 days’ data, the entire dataset is continuously updated to include only the last 10 days.

It is important to note that all input data to the SMA is evaluated equally, regardless of when it was entered. Traders who believe that there are more relevant data available often claim that equal weight in the SMA is detrimental to technical analysis. The Exponential Moving Average (EMA) was created to solve this problem.

EMAs are similar to SMAs in that they provide technical analysis based on past price movements. However, the formula is a bit more complex because the EMA assigns greater weight and value to the last price inputs. Although both mean values are valuable and widely used, EMAs react more clearly to sudden price fluctuations and reversals.

Since the EMA is more likely and faster to predict price reversals than the SMA, it is accordingly chosen by traders for short-term trading. It is important for the trader or investor to choose the type of moving average according to their personal strategies and goals, adjusting the settings accordingly.

Since MAs use past prices instead of current ones, they have a certain delay period. The larger the data volume, the greater the delay. For example, a moving average that analyzes the last 100 days will react more slowly to new information than a moving average that only takes into account the last 10 days. This is simply because a new entry in a large amount of data will have less impact on the total number.

Both can be advantageous depending on the trading settings. Large data volumes benefit long-term investors because they are less likely to be strongly affected by one or two large fluctuations. Short-term traders often prefer a smaller amount of data, which takes into account a more reactive trade.

In traditional markets, the most commonly used MAs are 50, 100 and 200 days. Exchange traders closely follow the 50-day and 200-day moving averages, and any breaks above or below these lines are usually considered important trading signals, especially when followed by crossovers. The same applies to trading in the crypt currency, but due to its 24/7 market volatility, MA settings and trading strategy may vary depending on the trader’s profile.

Bollindger bands

Bollinger Bands is a universal indicator of technical analysis, widely used by traders. John Bollinger has developed this indicator as a solution for finding relative highs and lows in dynamic markets. The indicator itself consists of an upper band, lower band and a line of moving average MA.

Two Bollinger bands are located at a distance of two standard deviations above and below the moving average (usually for 20 periods). When using this size, 95% of the standard deviation will be within the range formed by two bands.

Generally, an asset is considered overbought at the top when approaching the top Bollinger band, and oversold at the bottom when reaching the bottom band.

When the price fluctuates between the upper and lower Bollinger bands, the Bollinger bands become an excellent tool for assessing volatility. When the bands are squeezed, there is relatively low volatility in the market, which is excellent conditions for using a range trading strategy. Similarly, Bollinger Bands expand as the market becomes more volatile. During such periods, traders can use a trading strategy to break down or apply trend trading rules.

Trading volume

Volume is one of the most valuable and underestimated indicators in the crypto market. It shows how many people buy or sell the digital asset.

Before making a decision based on any other indicator, it is recommended to check the trading volume. If there is a significant price movement in a certain direction, there should also be an “impulse” of the movement, behind which there is a sufficient number of people.

The number of traders behind the price movement should be considered as “mass”, which should then be multiplied by “speed” to get the “force of impulse”. However, the less traders are involved in trading at a certain point, the less “momentum” is. A smaller impulse will mean less “price inertia” — a situation when the price can easily go backwards.

If you return to the example of a Christmas toy, you can imagine the possibility of sellers increasing the price from $50 to $100 in the peak of sales. However, if in fact it turns out that only five people were ready to buy it for $100, the true value of this product should be closer to $50.

Now you have understanding about basic technical indicators that will help you during your journey towards bigger trading profits. Use them to invest in Bitcoin cloud mining with Hashmart.io!