No one can deny that the cryptocurrency market is one of the most sought-out markets nowadays and traders are looking for an edge using the best crypto trading indicators.
Traders have been hooked on participating in this fast-growing market as many believe that cryptocurrency is the future.
This resulted in high market volatility, providing many trading opportunities for all traders. But this high volatility of the cryptocurrency market also poses problems such as the unpredictability of the prices.
In trading, the goal of a crypto trader is to buy and sell cryptocurrencies to make a profit.
However, in a highly volatile market like cryptocurrency, it can be intimidating to some as they find it difficult to find the most profitable trades. That does not mean that no one is making a significant profit from crypto trading. T
here are a lot of traders who have made money just from trading cryptocurrency.
So how can you also make a profit for yourself?
What Makes Crypto Trading Successful?
The basic goal of crypto trading is to buy and sell cryptocurrencies to make a profit. Since there can be endless trading opportunities in the market, how does a trader find the most profitable?
Before anything else, you need to have sufficient knowledge about the market you are trading in. The cryptocurrency market is much more different than the stock and forex markets and uses different technology. It is important to understand how the market operates to determine its behavior. But the problem with the crypto market is that it is highly volatile, making it hard to predict its movement. This is where your analytic skills should be put to use.
Technical analysis is an essential tool for trading but more so when it comes to crypto trading. It allows traders to determine price trends and find the most profitable entry and exit points. Cryptocurrency prices can change rapidly so you need to be able to pinpoint the best place to position your trade. Reading the chart is an important skill but you will need additional tools such as to help you get a better insight into the chart. Many traders use technical indicators to assist them in their analysis and identify opportunities.
Why should you use bitcoin indicators? Here are the reasons:
- Get more precise calculation on price movement
- Signal any changes in trend
- Measure the volatility of the market
- Eliminate emotions when trading
What Are The Best Trading Indicators?
As mentioned, the cryptocurrency market is notorious for being highly volatile and price changes can happen very quickly. This is why technical indicators play an important role in your trading strategy. There are a lot of indicators available that are used in different areas and markets but we will discuss the indicators that are suitable for the cryptocurrency market.
Technical Indicators for Cryptocurrency Trading
Below are the best trading indicators that crypto traders use:
1. Relative Strength Index or RSI
The Relative Strength Index (RSI) is one of the most popular technical indicators that traders add to their charts. It is an oscillator that displays whether a price is oversold or overbought. This technical indicator keeps track of the momentum of bitcoin’s price. This means that if the price keeps rising, buyers are taking control of the market. The opposite happens if the price decreases, it indicates that there are more sellers.
The index fluctuates between 0 to 100. The rule of thumb of this indicator is that if it is above 70, it means that the bitcoin is overbought. On the other hand, if it is 30 or below, the bitcoint is oversold. Trends can also be determined whether bearish or bullish with RSI. If it is below 50, then the bitcoin is bearish, and if it is above 50, the bitcoin is bullish. The strategy to trading with RSI is to find opportunities to buy or sell when prices are overbought or oversold.
To calculate RSI, here is the formula:
RSI = 100 – [100/(1+(average price increase/average price decrease))]
The usual time frame used in this indicator is 14 periods, but it can be longer at 21 or 31 periods if it is for long-term. Short-term traders can also use 5 or 7 periods.
2. Moving Average Convergence Divergence or MACD
The Moving Average Convergence Divergence (MACD) is an indicator that shows the relationship or difference between two moving averages. It helps in identifying when new trends begin and also their strength and is one of the best trading indicators.
To calculate the MACD line, subtract the 26-exponential moving average (EMA) from the 12-EMA. Then, the MACD line will be combined with the signal line which is a default 9-EMA, and from there, buy or sell signals can already be made. If the MACD line drops below the signal line, it generates a sell signal for trading. If the MACD line goes above the signal line, it generates a buy signal for trading.
3. Trading Volume
Volume is also a great indicator when it comes to crypto trading. Using volume as an indicator will help in determining how many people are trading. It can also determine the strength of trends and price movements.
If the price of bitcoin rises significantly, there is a mass of people buying it. The same can be said if the price is decreasing drastically, a lot of traders are selling. Whenever the price changes, it is important to find out how many traders are behind it. If many traders are causing that change, it indicates that the momentum will probably be sustained. However, if there are fewer traders behind the change, there is a possibility of a reversal.
4. Ichimoku Cloud
The Ichimoku Cloud is an indicator that uses five lines that demonstrate averages over specific time periods. It is up to the trader how long those periods are. When lines cross, the area between them is shaded which forms a “cloud”. If the price goes above the cloud, there is an uptrend and if the price falls below the cloud, there is a downtrend. You can also determine the strength of the trend if the cloud is moving in the direction of the price.
This trading indicator is great for identifying support and resistance levels and gauge momentum.
5. Fibonacci Retracement
The Fibonacci Retracement tool is used to identify key support and resistance levels by dividing peak to trough distance by the key Fibonacci ratios.
Traders use this indicator to find out whether the prevailing trend will continue or not. This indicator is used for more advanced trading opportunities.
6. Simple Moving Average or SMA
The Simple Moving Average (SMA) is the simplest indicator that calculates the average closing prices over a specific period of time. With this indicator, traders can predict whether a trend is going to continue or there will be a reversal.
Trading using SMA can also help in identifying buy or sell signals. Usually, SMA is done in pairs: a shorter SMA period and a longer SMA period. If the shorter SMA crosses below the longer SMA, it indicates a bearish market and considered as a sell signal. But if the shorter SMA crosses above the longer SMA, it indicates a bullish market and considered as a buy signal.
7. Stochastic Oscillator
The stochastic oscillator is an indicator that displays momentum by comparing the closing price of bitcoin to a range of prices over a specific period of time. Just like RSI, this indicator is helpful in trading for determining whether bitcoin is overbought or oversold on a scale of 0-100. Bitcoin is considered overbought if the result is above 80 and oversold if the result is below 20.
The difference between Stochastic Oscillator and RSI is that the former uses two lines while the latter only uses a single line.
8. Average Directional Index or ADX
The Average Directional Index (ADX) is a trading indicator that determines the strength of a trend. The calculation of ADX is based on the moving average of the price range expansion in a given period of time. The usual period used is 14 periods and the index ranges from 0 to 100. If the calculated value falls between 0-25, it means that the trend is weak, but if it rises above 50, the trend is considered very strong.
This indicator does not show the direction of the trend, but rather, its momentum and is a more difficult trading indicator to use.
9. Bollinger Bands
Bollinger Bands are used to show volatility and identify if there are overbought or oversold conditions. It is composed of three lines: the upper band, a 20-day SMA line, and the lower band. The upper and lower bands are standard deviation lines and react to the volatility. If the bands widen, it indicates high volatility. But if the bands constrict (also known as a “squeeze), it shows low volatility but may also indicate that there is a period of high trading volatility.
10. Parabolic Stop and Reverse
The Parabolic Stop and Reverse (SAR) indicator is used to show the direction where the asset is moving and identify key entry and exit points on the chart. It is a series of dots placed above or below the price bars and shows whether the price is going up or down. A dot above the price bear indicates a bullish signal and signifies an upward momentum. The opposite happens when a dot is placed below the price bar.
This trading indicator also shows that when the price rises, the dots also do the same and move faster as the trend develops.
When using any of these indicators the accuracy of the data used by the trading platform is important.
Bitcoin and other Cryptocurrency Screeners
A screener is used to tell you whether a market meets certain conditions. For example if you were using the RSI indicator you could use a screener to show you only crypto currencies that had an RSI greater than 80.
Screeners are very handy for quickly finding all the markets that meet certain conditions.
What Bitcoin Indicators Should I Use?
Although there are a number of different technical indicators, there is no single indicator that will provide you the best results.
The best way to find out the best indicator to use is to understand and test them until you find out what works with your trading strategy.
In fact, you can use a combination of these indicators to increase your chances of finding opportunities especially with a highly volatile market such as cryptocurrency.
In addition technical analysis should always be supported by fundamental analysis which considers things like news flow.
In the end, the decision of what indicators to use will be up to you. Make sure you follow our blog for more great trading advise.