In order to succeed in crypto trading, you need to be able to predict the direction of the market. This is done using technical analysis indicators. It is important to know which indicator to use at any time to be able to accurately predict the direction of price.
There are many technical indicators that crypto traders use, in addition to fundamental analysis. In this guide, we’ll discuss three of the top indicators used by traders to make trading decisions. If you wish to trade crypto or are already trading, this will help you to make better decisions.
The following are the top indicators you can use.
Moving Averages (MA)
In its simplest form, Moving Average (MA) is the average closing price of a crypto asset for a given period of time. There are many types of moving average, but the most commonly used in crypto trading are Simple and Exponential moving average.
Simple moving average is just the average closing price over a period of time, for example 30 days. You add the prices for those 30 days and divide by the number of days. Exponential moving average, just like SMA is the average closing price for a period of time, but it gives more weight to recent prices.
The MA is used to determine changes in trends of the price of an asset, and traders use two at a time for this purpose. One is of shorter time frame such as 15 days, and the other is longer time frame like 30 days. You can use any variation of time for this.
The crossing of a short term MA over a long term MA is called a Golden Cross, while the crossing of a long term MA over a short term MA is called a death cross. The first is an indication of transition from a bearish trend to a bullish trend, while the second is indication of the beginning of a bearish trend.
Relative Strength Index (RSI)
RSI is a momentum indicator that tells you if a crypto asset is overbought (a bearish indication) or oversold (bullish indication). An RSI under 40 generally means the asset is oversold, while an RSI of over 70 shows that the asset is overbought.
Although this is the ideal situation, other factors may kick in which could affect the accurate reading of the RSI. For example, an RSI over 50 could be a sign that the asset is overbought already and an RSI under 40 may not necessarily mean that the asset is already oversold.
Bollinger Bands (BB)
Bollinger Bands are two lines used along with a simple moving average to determine the momentum of a crypto asset. The bands represent a standard deviation from the average price and can indicate the next momentum, while the moving average is known as the trendline.
When the two bands contract towards the moving average, it shows that there is low volatility and that the asset may be on the verge of experiencing volatility, which shows trading opportunities. Bollinger bands far from the trendline show that there’s high volatility, which means a period of low volatility could be close by.
At the same time, if the upper band moves towards the trendline while the lower one is moving downwards away from it, this shows that price could be heading downward. The lower band moving upward towards the trendline with the upper band away indicates the price could be heading up.
Just plotting the bands can tell you about the volatility of the asset and where the price is likely to go in the short term.
Conclusion
These are three of the top technical indicators used in crypto trading. If you’re interested in trading crypto, these will help you to know when to enter of leave the crypto market so that you can minimize your risks and increase your profit potentials.
Sometimes, you’ll need to combine two or more of them at once to have a clearer direction on the market, but each one on its own can give you a good clue.
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