The 5 Technical Indicators for Trading Cryptocurrencies
What are Crypto Trading Indicators?
You will hear a lot about indicators when you start trading cryptocurrencies. You will probably see the word several times in this article alone. But what are indicators?
Indicators are mathematical calculations, based on a trading instrument’s price and/or volume. They are used to try to predict future price movements.
Indicators can also be an essential piece of information that helps you make a good decision while carrying out technical analysis of crypto assets.
Bollinger Bands
Bollinger Bands are a technical analysis tool created by John Bollinger in the 1980s. They were originally designed to measure a market’s volatility, but have evolved to be more of a predictor of future price moves than anything else. Bollinger Bands consist of two bands that are placed two standard deviations away from the simple moving average. The upper band acts as resistance and the lower band acts as support. As prices hit or exceed these levels, they will often reveal new information about market sentiment, momentum and direction.
For example: You’re watching Bitcoin on the hourly chart with one-day Bollinger Bands (20 periods). If BTC has been trading inside its two bands for an extended period of time, it is most likely oversold (or overbought if it was at its lower band). Typically when this happens and Bitcoin reaches one of those extreme points, it will break out in the opposite direction. In this scenario you would look to go long on BTC at or near its lower band because there is a high probability that we will see a reversal soon after reaching that point due to the increased odds of being oversold. But be careful! The rule is not always true for cryptocurrencies because they are newer markets.
RSI
RSI was developed by J. Welles Wilder, who believed that the various oscillators were not what they appeared to be. The RSI indicator is a momentum-based oscillator that measures past price changes in order to gauge where prices may be headed next. The RSI can oscillate between 0 and 100. If the RSI is above 70, then a cryptocurrency is considered overbought and if it’s below 30 then it’s oversold. This indicator helps traders determine when there might be a reversal or correction ahead in price.
The formula for the Relative Strength Index (RSI) looks like this:
RSI = 100–100/1 + RS
Where RS = Average Gain / Average Loss
Moving Average
Another useful indicator that can help you identify a cryptocurrency trend is the moving average. The moving average is a technical indicator that shows the average value of a crypto’s price over a defined period of time.
There are three kinds of moving averages:
Simple moving average (SMA) calculates the mean price for a specific time period, say 5 or 10 days, and adds them together to create an average price. It then plots this across the chart, creating an easier-to-read line chart than raw data prices. This helps traders see trends more easily. However, it can be distorted by spikes in pricing, as they will influence its calculations too much.
Exponential moving average (EMA) also identifies trends more clearly by smoothing out fluctuations in prices (i.e., putting less weight on sudden spikes). EMA gives more weight to recent prices because they carry more significance than older ones (because of how fast markets move these days).
Weighted moving averages (WMA) give even more weight to recent prices; however, it can still be influenced by sudden spikes in pricing and is not always so effective at eliminating noise from charts.
Ichimoku Cloud
Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is a technical indicator that has been used by Japanese commodity and stock market traders for decades and is gaining increasing popularity amongst western stock market traders, being commonly used by hedge funds and portfolio managers.
The Ichimoku Cloud consists of five lines, or “clouds”: Tenkan-sen (turning line), Kijun-sen (standard line), Senkou Span A (leading span A), Senkou Span B (leading span B) and Chikou Span (lagging span). The leading spans A and B form one cloud component, which shows support and resistance areas. The lagging span in conjunction with the cloud shows past price action. The line at the midpoint of the cloud is called Kumo.
Kumo clouds are clearly separated: If prices are above the Kumo, it signals bullish conditions ahead; if prices are below the Kumo, it signals bearish conditions ahead.
Parabolic SAR
The Parabolic SAR (Stop And Reverse) is a technical indicator that was developed for analyzing trending markets. On a chart, this indicator is represented by dots and it is used to determine the direction of the trend, as well as to identify the point when it reverses.
Here we will explain how to use Parabolic SAR in trading cryptocurrencies and what you should pay attention to if you want your strategies to be successful.
Use These Indicators to Take Advantage of Your Crypto Trading.
Trading cryptocurrency is great fun, but it can also be tricky. There are many wild swings of price that seem to defy the laws of gravity, and those who don’t know how to handle them may find their portfolios depleted in a few hours.
To help you avoid losing all your money on a bad trade, these are the five technical indicators that will ensure you make smart trades time after time. But, do not rely on them entirely as they can also fail.
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