Introduction
What You Should Already Know
Before learning the advanced indicators covered in this article, you should be familiar with the basics of trading that have already been covered in our how to trade bitcoin series.
Part 1: Getting Ready to Trade Bitcoin
The first part covered the basics of Bitcoin, trading terminology and how exchanges work.
Part 2: Making Your First Trade
The second part covered how to read charts, how to spot trends using moving averages and the MACD, and lastly how to place a trade.
Part 3: Beginner’s Technical Analysis
The third part introduced the benefits and limitations of technical analysis, and then common price patterns.
It is recommended that you are familiar with these topics, particularly beginner’s technical analysis, before learning more advanced technical indicators.
Key Terms Explained
Ichimoku Cloud — an indicator that is used for identifying support, resistance and momentum. There are four key components to the Ichimoku cloud: Kijun Sen (blue line), Tenkan Sen (red line), Chikou Span (green line) and the Senkou Span (clouds). The purposes of these lines will be covered shortly.
These lines are annotated on the chart below.
Relative Strength Index (RSI) — you will be happy to hear that the RSI is a far simpler indicator. The RSI identifies over-bought or over-sold conditions. It can also be used to identify the current market trend. An application of the RSI can be seen below.
Bollinger Bands — this indicator is used to gauge market volatility and support or resistance levels. Tighter bands mean flatter markets, while looser bands signal more volatile markets. As the price tends to gravitate towards the middle of the two bands, Bollinger Bands can also indicate support and resistance levels. This can be seen below.
Parabolic Stop and Reversal (SAR) — another simple indicator, the Parabolic SAR is used to identify the start and end of market trends. This is indicated by small dots; dots above the candlesticks shows a down trend, and dots below the candlesticks shows an up trend.
How to Trade Technical Indicators
Ichimoku Cloud
It is important not to be overwhelmed with the amount of information provided by the Ichimoku Cloud. Let’s examine each component part individually to become more familiar with how the indicator works.
The ‘Span’ indicators are slightly more long-term components of the Ichimoku Cloud. They are useful for monitoring wider market trends.
Senkou Span (Clouds) — this simplest part of the indicator shows current and future support and resistance levels. When the price is below the cloud, the lower and upper edges of the cloud both act as resistance. When the price is above the cloud, the upper and lower edges act as support.
Chikou Span (Green Line) — this line follows the current price, but is plotted 26 candlesticks behind. This makes it a lagging indicator of market trends. When this lagging line rises above the candlesticks, this is an indication of an uptrend. Conversely, when this line falls below the candlesticks, it is indicative of a downtrend.
The ‘Sen’ indicators are more for current and near-future price trends.
Tenkan Sen (Red Line) — this line shows the current market trend. As you would expect: a rising line indicates an uptrend, a falling line indicates a downtrend and a flat line indicates a flat market.
Kijun Sen (Blue Line) — this is arguably the most important line because it indicates the next direction the price is likely to move in. If the price rises above the line, the price is likely to continue to rise. On the other hand, if the price falls below the line, the price is likely to continue to fall.
All of these ‘mini-indicators’ have their own unique trading strategies, which will now be explained.
Senkou Span (Clouds)
The main Senkou Span (Clouds) trading strategies are support/resistance levels and crossovers.
Firstly, we will look at support and resistance strategies. Like traditional support and resistance lines, trades can be executed when the price ‘bounces-off’ the cloud or ‘pierces’ the cloud. This is demonstrated on the chart below — opportunities to go short have been highlighted by the yellow circles.
The Senkou Span (clouds) are telling us that there have been several opportunities to go short on bitcoin.
The first yellow circle represents an opportunity to go short after the price fell through the Senkou Span (clouds). This suggests that support at $282 has been broken and further price declines can be expected.
The second and third yellow circles show opportunities to go short when the price fails to break through the clouds, which is acting as resistance. This tells us that the downtrend is still strong and the market is not ready for a trend reversal.
Now let’s look at trading crossovers. Similar to moving average crossovers, the clouds can change their sentiment based on price behaviour. These crossovers are identified on the chart below.
The first yellow circle highlights a bearish crossover — the red edge of the cloud has risen above the green edge of the cloud. Therefore a trader should go short at the time of this crossover.
The second yellow circle highlights a bullish crossover — the green edge of the cloud has risen above the red edge. Although this should be a indication to buy, a trader doing so would have lost money. It is important to recognise that technical analysis indicators will never be right 100% of the time.
Lastly, the third yellow circle shows another successful opportunity to go short during a bearish crossover. Given the following drop to $260, this was a great opportunity to place a highly profitable trade.
Chikou Span (Green Line)
The Chikou Span (green line) is known as a lagging indicator. This is because the line is plotted 26 periods behind the current price. Traders can spot both bullish and bearish signals from the Chikou Span (green line).
A bullish crossover occurs when the Chikou Span (green line) rises above the candlesticks. An example of this is the yellow circles on the chart below. The left yellow circle indicates the moment the Chikou Span (green line) moves above the candlesticks; the right yellow circle indicates the point at which a trader would buy.
The orange, blue and pink circles show bearish crossovers and the respective positions at which traders would sell.
If we focus on the pink circles, we can see that the Chikou Span (green line), sharply fell below the candlesticks. The pink circle on the right shows the point at which this happened in real-time (26 candlesticks in front of the Chikou Span). Evidently, selling at this point would have been a profitable trade.
Kijun Sen (Blue Line)
Kijun Sen (blue line) will occasionally crossover the candlesticks. These crossovers can be traded in a similar fashion to Senkou Span (clouds) crossovers or moving average crossovers.
The above chart depicts both bullish and bearish crossovers. Traders should aim to place trades at the same time as the crossover.
A bullish crossover is where the candlesticks rise above the Kijun Sen (blue line). This means that a trader should buy in this situation.
A bearish crossover is where the candlesticks fall below the Kijun Sen (blue line). This means that a trader should sell in this situation.
The Senkou Span (clouds) can also provide additional insight to traders using Kijun Sen (blue line) crossovers. Above the Senkou Span (clouds), bullish crossovers become stronger buy signals, and bearish crossovers become weaker sell signals.
Conversely, below the Senkou Span (cloud)s, bullish crossovers become weaker buy signals, and bearish crossovers become stronger sell signals.
Relative Strength Index
In stark contrast to the Ichimoku Cloud, the RSI uses just 1 line for trading signals. This line is plotted below the price chart on a scale of 0–100.
As the chart above demonstrates, the RSI can provide traders the following signals:
Overbought — when the RSI is above 70, the price is likely to have a sharp downwards correction.
Uptrend — when the RSI is above 50, the price is considered to be in an uptrend. Traders could go profit from either buying or selling depending on other indicators.
Downtrend— when the RSI is below 50, the price is considered to be in a downtrend. Traders could go profit from either buying or selling depending on other indicators.
Oversold— when the RSI is below 30, the price is likely to have a sharp upwards correction.
The two most important signals for traders are the overbought and oversold indicators. Instead of simply selling at overbought and buying at oversold, traders should aim to profit from reverals.
Bullish Reversal — this occurs when the price moves from an RSI of under 30 to above 30. This is indicative of the end of a downtrend and the start of a new uptrend. Hence traders should aim to buy at this point.
Bearish Reversal — this occurs when the price moves from an RSI of above 70 to under 70. This is indicative of the end of an uptrend and the start of a new downtrend. Hence traders should aim to sell at this point.
Bollinger Bands
Bollinger Bands indicate market volatility and support or resistance levels. The indicator overlays two bands above and below the candlesticks, with an average line in the middle.
There are two main ways to trade Bollinger Bands: support /resistance levels and squeezes.
Bollinger Bands: Support and Resistance
Similar to traditional support and resistance patterns, the lower part of the Bollinger Band can act as support, and the upper part of the Bollinger Band can act as resistance.
The above chart demonstrates how a trader should trade the support and resistance levels provided by Bollinger Bands. Simply, they should buy at the lower support and sell at the higher resistance. This strategies works best when the Bollinger Bands are tight — the chances of a breakout are lower.
Bollinger Bands: Squeezes
A squeeze occurs when the upper and lower bands tighten — they ‘squeeze’ the candlesticks. This tells a trader that a large movement is incoming. The large movement is typically known as a ‘breakout’, where the candlesticks briefly escape the bands.
On the chart below, the first squeeze and breakout is an example of a typical price pattern. The subsequent price patterns are closer to mini-squeezes and breakouts.
A trader should aim to trade during the first breakout after a Bollinger Band squeeze. This can be identified by the first candlestick the escapes the Bollinger Bands.
If this a breakout above resistance, a trader should buy with the intention to sell when the rally continues.
If this breakout is below support, a trader should sell with the intention to buy when the drop continues.
Parabolic SAR
This last indicator is used to identify the start and end of a market trend. The Parabolic SAR is the series of dots above and below the candlesticks. Dots above the candlestick indicate a downtrend; dots below the candlestick indicate an uptrend.
Unlike the previous indicators, which have focused on when to open positions, the Parabolic SAR is most useful for timing the closing of positions. Specifically, three consecutive dots indicate a trend has reversed and a profitable position should now be closed.
This makes the Parabolic SAR a great indicator to use in conjunction with the other indicators outlined in this article. Let’s look at a practical example.
Here a trader has gone short after seeing a bearish crossover on the RSI (movement from over 70 to under 70). The trader then profits from a substaintial price fall. However, as the price begins to drift upwards once again the trader is unsure whether or not the downtrend will continue.
By checking the Parabolic SAR, 3 support dots can be seen. This verifies that the downtrend has indeed ended and the short position should be closed.
How to Apply Technical Indicators at BTC.sx
- Open up the trade screen and click the graph icon on the price chart
2. Choose your preferred technical indicator from the list
3. Begin studying chart patterns
Conclusion
You should now be familiar with trading based on Ichimoku Clouds, RSI, Bollinger Bands and the Parabolic SAR. If you have followed this ‘How to Trade Bitcoin’ guide from the start, you should now be a budding trader capable of making profitable trades based on logical analysis.
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Written by Joe Lee, BTC.sx / Magnr CEO. Joe first discovered Bitcoin in 2011 and built his own trading bots turning an initial $100 investment into $200k. He then turned his attention to building trading infrastructure and BTC.sx was born. After gaining rapid traction, Joe left his investment banking job to focus on BTC.sx.
