How to Use Technical Indicators for Cryptocurrency Trading
Traders use technical indicators to figure out both long and short term price direction of an asset. They can measure anything from momentum, volume, quality of price movement and so much more. They are mathematical calculations or ‘signals’ used in technical analysis to determine what may happen next with the price of a security, commodity, stock, currency, or in our case cryptocurrency.
Some traders prefer to rely on historical price/volume data to predict the price movement rather than fundamental indicators like profit, revenue, or turnover.
Nevertheless, after reading this article, you’ll have a better overall understanding on how the top six indicators are used. You should also be able to identify the trends in prices, for any cryptocurrency you’re currently looking to trade.
Within this guide we’ll discuss the following Technical Indicators:
- Relative Strength Index
- Stochastics Oscillator
- Moving Average Convergence Divergence
- Average Directional Index
- Aroon Oscillator
- On Balance Volume
Relative Strength Index
Relative Strength Index (RSI) helps you quantify the gains and losses of an asset over a fixed period of time. This is one of the better-known indicators known throughout the crypto trading community. It’s used by both beginners and advanced traders alike.
RSI ranges from 0 to 100 and helps you figure out if an instrument is overbought or oversold. If an asset’s RSI is ticking around 70, it is overbought while anything below 30 means it is oversold.
It will also help you determine if your cryptocurrency is within a bullish or bearish phase. Anything below 50 is considered bearish. As you might’ve guessed, anything above 50 is bullish. If movement tends to fluctuate between 0–50 for an extended period of time, it’s in a bearish cycle. If movement fluctuates between 50–100 it’s currently in a bullish cycle.
Crypto traders also use a two-line momentum indicator called the stochastic oscillator to measure the difference between the closing price and the range of prices over a defined period of time. Typically, the Stochastics Oscillator uses the past 14 day’s prices to arrive at a score.
A score above 80 signifies the asset is overbought and a score below 20 means it is oversold. Stochastic Oscillator’s scale runs on a scale of 0 to 100, just like the RSI.
The %K and %D are the two defined lines in this chart. The %K line tracks the asset’s momentum and %D traces a three-day simple moving average of %K. Typically, the best buy and sell times are indicated by %K line cutting over or under the %D line.
Moving Average Convergence Divergence (MACD)
Another famous indicator used by traders is called the Moving Average Convergence Divergence (MACD). This signal is used to predict beginning of a short-term price trends and the reversals of a security. To calculate the MACD, subtract the 26-day exponential moving average (EMA) of a cryptocurrency from the 12-day EMA.
MACD signal is said to be positive when the 12-day EMA is above the 26 days EMA. This indicates the momentum is rising i.e. it is time to buy. When the longer term moving average is above the short term average, you should sell since the momentum is moving downward.
Apart from the MACD, some traders also track the ‘signal’ line, which is a 9 days EMA to help them identify the buy/sell calls. When the signal line is breached in an upward move, it indicates a bullish run and MACD running below the signal tend to indicate a bearish movement.
Average Directional Index
This indicator is used to detect the quality of a price movement. The ADI has a score range of 0 to 100 and is considered to be a non-directional signal. i.e it does not show a specific direction in the price movement. It is used to determine the strength of an upward or a downward momentum.
If the ADI gives a reading of over 25, traders consider that as a time to implement trend-trading strategies while a score below 25 indicates the opposite.
ADX Reading Strength
- 0–25 No Trend
- 25–50 Weak Trend
- 50–75 Medium Trend
- 75–100 Strong Trend
This indicator scale is set from -100 to 100 and is used to predict when the momentum of a security changes direction. Cryptocurrency traders believe the Aroon Oscillator is a versatile tool since it signals both the direction of the price movement and its strength.
A score above 0 indicates an upward momentum. The strength of the signal can be identified by the value of the AO reading. For Example, a security with an AO value of 10 is weaker in comparison to that of another security 50. Both are in a positive upward trend.
Following in the same lines, any score below 0 indicates a negative trend, i.e downward momentum. A change in the direction of the AO indicators signifies the reversal of the price direction.
On Balance Volume
Traders also use On Balance Volume (OBV) to predict the price of an asset based on the change in the volume of its transactions. On Balance Volume is a cumulative indicator and is a running total of positive and negative volumes.
The premise being that any dramatic shift in volume will indicate a future change in the price of an asset.
If the volume rises steadily with no change in price, the OBV indicator will rise and predict a price increase in near future. In case of OBV is decreasing while the price stays steady, it indicates an upcoming price fall of an asset.
Crypto traders use these Technical indicators to get a deeper insight into the price action in order to help them predict the future position of any particular cryptocurrency.
These indicators are mathematical functions that dig deep to find the co-relation between the price and volume shifts. When multiple indicators are used together, it is easier to forecast the price movements.
Now that you’ve got a good understanding on what these indicators are for, head on over to our technical analysis page and give them a try.