Top Six Crypto Trading Indicators and How to Use Them on Cryptohopper
Let’s talk about it. Today we are reviewing the top six most common indicators for crypto trading and how to use them on Cryptohopper.
We know that there are many different indicators that traders can use to analyze cryptocurrencies. And it can be difficult to know which ones to use. So let’s talk about it. Today we are reviewing the top six most common indicators for crypto trading, and how to use them on Cryptohopper. And the top six most common indicators are the:
Now, the first indicator that I want to touch on is the Exponential Moving Average, or EMA for short. While there are many other moving averages out there including the SMA, TEMA, DEMA, and HULL, the exponential moving average is one of the most used in the crypto market. And that’s because the EMA smooths out the data to create a clear line and trajectory on the chart. It takes a number of periods and averages out candlesticks within that timeframe. This is great because it removes noise from the market so users can clearly see the direction of the current trend.
Now, keep in mind that users can set the number of periods to whatever they like, and the longer the period, the slower the EMA will react. Some of the typical periods used are the 9, 10, 15, 20, 25, 50, 100, 200, and 300 days.
So, let’s look at how to use the EMA on Cryptohopper.
Now, there are a ton of ways to trade with moving averages on Cryptohopper. At Cryptohopper, we actually use two moving averages: one with a shorter period, and one with a longer one. Basically, when the shorter moving average crosses above the longer one, a buy signal is given. And on the other hand, if the longer moving average crosses above the shorter one, it sends a sell signal.
So, for example, if the 50 EMA crossed above the 200 EMA, it would give a buy signal. And if the 50 EMA crossed below the 200 EMA, it would give a sell signal. In the example of a buy signal, we would consider the cryptocurrency in question on the rise, because the average of the last 50 periods is bigger than the average of the last 200 periods.
In general, moving averages — including the EMA- work best on higher timeframes. We’re talking 4 hours and above. That’s because they are trend following indicators, which means that they follow the trend, and the trend is clearest on higher timeframes. The EMA also works well when there is a clear trend, like we see in the time period between March 2020 and November 2021. The EMA is well-suited to find the beginning of a trend and follow it all the way to the end.
However, the EMA and other moving averages in general have trouble when it comes to ranging markets. So, ranging markets take place when a coin is stuck between two levels. For example, in September 2022, Bitcoin was stuck between $17,000 and $25,000. Moving averages work poorly in this environment, because when Bitcoin starts rising close to 25,000, the moving averages will send a buy signal. After all, the EMA is thinking that this rise is the start of a new trend.
However, in a ranging market the price will come down again. And once that happens the EMA will sell lower, around $20,000, because it believes that this will be the start of a new downtrend. So you can see how in a ranging market you will end up buying high and selling low, which is the worst thing you can do in trading.
Now, like I mentioned earlier, the EMA is an indicator. And it’s important to keep in mind that indicators don’t work that well on their own. EMAs should generally be combined with other indicators, risk management settings, or price action. Oscillators generally work well together with the EMA.
And overall, trend-following indicators like the EMA don’t work well with Take Profit or Trailing Stop Profit. That’s because if you use trend-following indicators for your entries and exits, your profit per trade will vary greatly. Plus, using a take profit or trailing stop loss will limit the amount you can profit. A stop loss, on the other hand, can come in handy, especially if your moving averages are longer, like the 50 and 200. Longer moving averages are slow to react, and they will not react on time in case of a flash crash. That’s important because a flash crash, which is when a coin falls quickly in a short amount of time, is a common occurrence in the crypto market. A stop loss will help avoid a big loss in case of a flash crash.
So to summarize, the EMA is a great trend following indicator that should be used with other indicators, like an oscillator. Now, speaking of oscillators, I’d like to move on to the next indicator, which is the the Williams%R oscillator.
Williams %R
So, oscillators in general are indicators that, you know, oscillate like a pendulum between two values. William %R specifically oscillates between a value of -100 at the bottom, and 0 at the top. It is based on the last 14 periods by default.
But how does it work? Well, when Williams %R has a value below -80, it is said to be oversold, which means that the price has fallen recently. On the other hand, when the price is above -20, it means that an asset has been overbought, meaning that the price has risen significantly. It’s common to buy when Williams %R shows oversold readings, which that means that you buy low, and to sell when Williams %R shows overbought readings, which would mean that you are selling high.
So with that in mind, how do we use the Williams%R on Cryptohopper?
Well, in general, the default values of the indicator are -80 for oversold, -20 for overbought, and 14 for the number of periods. However, most trading platforms, including Cryptohopper, allow you to change these values.
One of the great things about Williams %R or other Oscillators in Cryptohopper is their customization. Because you can customize a buy or sell signal to be less than or more than a value on Cryptohopper, this provides you with a lot of flexibility when making strategies. For example, you can make a strategy that buys when the Williams %R is oversold and sells when it is overbought (less than -80 or greater than -20, respectively).
However, a user could alter the settings to buy when the Williams %R is overbought and sell when it is oversold. This will essentially make the Oscillator work similar to a trend following indicator, like the EMA.
And on top of that customization, another great aspect of oscillators on Cryptohopper is that they provide sticking signals if you choose greater than or less than in your settings. Sticking signals are basically signals that will continue as long as a condition is met. So for example, Williams %R can be set to continue sending buy signals as long as its value is below -80, and keep sending sell signals as long as the value is above -20.
Now, just like the EMA, Williams %R is also great when used together with other indicators. For example, a user could set Williams %R to buy when it is less than -50, and when the EMA provides a buy signal. This setting would thus make Williams %R act like a filter to ensure you are buying relatively low.
On top of that, another special feature on Cryptohopper is the “Keep candle for” option. And like the name suggests, if you have “keep candle for” turned on, then once a signal is given, that signal will be kept for a certain number of candles, which can be useful when combined with other indicators.
For example, let’s say you’re using both the EMA and the Williams%R together. You could make a trading system where a buy signal is sent when Williams %R reaches below -90, which would mean that the coin is very oversold. Now, when a token is very oversold, the EMA on its own wouldn’t get many trades, because it’s rare for the EMA crossover to happen at such oversold levels. However, if a trader uses the “keep candle for” feature, they might make a decent strategy. Because you will essentially be buying after the market experienced a serious crash thanks to the Williams %R, and then when it starts recovering thanks to the EMA.
Now unlike the EMA, oscillators work best with smaller time frames, such as 1 hour or 30 minutes. That’s because the 1-hour and 30 minutes chart are better at identifying temporary pullbacks in the price, while bigger timeframes are better at identifying the overall trend.
And again, unlike the EMA, Williams %R works well with take profit and trailing stop loss, because traders usually buy after small corrections, and therefore a small take profit is more appropriate here. Williams %R is considered a sensitive oscillator, especially when compared to something like the RSI. And as such, it is much more reactive to smaller price movements and will reach an oversold level faster. As a result, you will see more trades with the Williams%R than with the EMA or other oscillators, but the profit per trade will be significantly smaller.
I would add that a stop loss would also work great with Williams %R and other oscillators. One of the main pitfalls of oscillators is that they can be oversold for a long time. Just because a coin is low and oversold it doesn’t mean that it cannot go lower. A stop loss will therefore limit your downside.
Now, all of that said, it’s important to note that oscillators work well in a ranging market where the price has no clear direction. This is because with an oscillator, you will end up buying low towards the bottom of the range and selling high towards the top of the trend, unlike the EMA ,which does the opposite.
However, oscillators do not work well in a trending market because the price can always continue to fall further. So even if you buy low, it can continue to fall lower. Therefore, it can lead to multiple losses in a down-trending market. A similar concept also prevents Williams %R from making significant profits in an up-trending market. Just because something is overbought, it doesn’t mean that the price cannot continue to go higher. Thus, traders lose the opportunity to make significant profits by following the trend.
So that is the Williams %R, a great oscillator to use in a ranging market. Now, since we mentioned the RSI earlier, let’s talk about it!
RSI + RSI with region crossovers
The RSI, which stands for Relative Strength Index, is an oscillator that is similar to Williams %R and works essentially in the same way.
The main differences are that 1) the RSI is significantly less sensitive, so it takes a bigger move in the market to bring it to either oversold or overbought, and 2) the oversold and overbought levels are different. The RSI oscillates between 0 and 100, with 30 considered oversold and 70 considered overbought.
While the RSI works essentially the same as Williams %R on Cryptohopper, there is another variation of the indicator, which is the RSI with Region Crossovers.
The RSI with region crossovers shares the same values with the regular RSI; the only difference lies in how it is traded. With the RSI with Region crossover, a buy signal is sent once the RSI comes out of an oversold area. So say you set the RSI oversold level as 30. The RSI with Region Crossovers will send a buy signal when the value of the RSI goes below 30 and then climbs back up above 30. This is great because it resolves a common issues with oscillators related to trends. With the region crossover addition, you’re not buying a coin that is constantly falling, but instead are buying a coin that is starting to recover again.
The sell signal for the RSI with region crossover is essentially the opposite of what I just said. The sell signal will happen when the value of the RSI comes down below the overbought threshold. So for example, imagine that the overbought threshold is 70. A trader will get a sell signal when the RSI goes above 70 and then comes back down below 70. Now, this concept works great in a trending market because just as an asset can be oversold for a long time, it can also be overbought for a long time. Therefore, with the RSI with region crossover, traders follow the trend more and sell significantly higher than a regular oscillator in a strong trend.
However, keep in mind that the RSI with region crossover is a one-off signal and not a sticking signal, as seen in other oscillators. Therefore, you’ll only get one signal at the crossover point. As a result, you may need to use the “keep candle for” feature to use it with other indicators that only give one signal. Another option is to use it with trend-following indicators like the MESA or Parabolic SAR, which do provide sticking signals.
Now, that wraps it up for the RSI with region crossover. And since I just mentioned the MESA, which is one of my absolute favorite indicators on Cryptohopper, let’s talk about it.
MESA
So, the MESA Adaptive Moving Average is a trend following indicator like the EMA. The main difference between the MESA and the EMA on Cryptohopper is that the MESA provides sticking signals, while the EMA does not. As long as the moving average, which is also known as the MAMA, is above the MESA’s long moving average, which is also called the FAMA, it will give a buy signal. On some trading platforms the MESA comes with a green cloud when the MAMA is above the FAMA, which is great for visualizations. Similarly, the opposite situation is shown with a red cloud on the chart.
The MESA and EMA also use different mathematical formulas, which makes one more reactive than the other. And the MESA is an adaptive moving average, which means that its sensitivity to price changes differs based on market conditions.
Plus, inputs for the MESA are very different from the EMA. For the MESA, its defaults are 0.5 for the Fast limit and 0.05 for the slow limit. That said, bigger numbers result in more trades. So a fast limit of 0.7 with a slow limit of 0.075 would result in more trades than the default values.
As for sell settings, the MESA is usually only suitable to work with a stop loss because a take-profit and a trailing stop loss will hamper it’s big wins. It also works well on the bigger timeframes, such as the 4H chart or larger. However, one of the things I love most about the MESA is how well it combines with other indicators. The MESA is a trend following indicator with sticking signals, which makes it an excellent candidate to use as a filter.
Now, a filter is a technical indicator that is used to filter out fake signals. So one of the best uses for the MESA is to put it on longer timeframes and then use other indicators on smaller timeframes to enter and exit the market.
After all, the purpose of the MESA on the longer timeframe is to find the direction of the trend. Once the MESA identifies the overall trend, you can then use an oscillator like the RSI or Williams %R on a smaller timeframe to find the bottom of the trend. Other indicators that can work well on a smaller time with a MESA filter are the MACD and Bollinger Band, or even other moving averages.
So that is the MESA, which is one of my favorite indicators. But there are other great ones as well, like the Parabolic SAR.
Parabolic SAR
The Parabolic SA, or PSAR for short, is another indicator similar to the MESA. Basically, the Parabolic SAR is another trend-following indicator with sticking signals.
Although it performs a similar function to the MESA, the PSAR usually looks very different on the chart. That’s because it’s is made up for small crosses or dots, depending on the trading platform, that are either below or above the candles. So if you’re reading a chart, when the crosses are below the candles, it means that the Parabolic SAR is bullish and it will keep sending buy signals. Conversely, when the crosses are above the candles, it means that the indicator is bearish and it will keep sending sell signals.
So with that said, how would you use the Parabolic SAR on Cryptohopper?
Well, on Cryptohopper, the Parabolic SAR has very similar inputs to the MESA. The default values are 0.02 for the Acceleration Factor and 0.2 for the Maximum. And just like the MESA, higher values here result in more changes between buy and sell signals.
One of the main differences between the Parabolic SAR and the MESA is that the Parabolic SAR is more sensitive to trend changes, and it reacts quicker. This makes the PSAR a better filter for coins that tend to change directions faster.
Another aspect that separates the two indicators is that the highs and lows of different candles are much more important to the Parabolic SAR. If the high or low of a candle touches the cross of a Parabolic SAR, the Parabolic SAR will then change direction. So if the Parabolic SAR is bullish with the crosses below the candles, and a there is a suddenly a big downward wick on the low of a candle, then the Parabolic SAR will turn bearish and the crosses will be above the candles. On the other hand, the MESA by default just takes into account the closing prices and ignores the lows and highs.
Now, keep in mind that there are some coins in the crypto space that have big high and low swings, which will make it difficult for the Parabolic SAR to work well. The Parabolic SAR isn’t suited to coins with big high and low swings, since it will change directions far too often, but the overall trend doesn’t change. So I would say that MESA is better suited for those kind of coins.
Alright, so that wraps up the Parabolic SAR. Now, the last indicator I want to talk about today is the Bollinger Bands, which you’ll see shortened to “BB” online.
BB Bollinger Bands
Bollinger Bands are different from both indicators and oscillators, and many see it as a volatility indicator.
Essentially, Bollinger Bands are made up of a simple moving average in the middle, flanked by an upper limit line above it and a lower limit line below it. The upper limit line is two standard deviations above the SMA, and the lower limit line is two standard deviations below the SMA.
Now when the market is stable, the upper and lower limit lines will contract, and they will be pretty close to the SMA in the middle. But when the market is volatile, the upper and lower limits will be further apart from the middle line.
So how do you use Bollinger Bands on Cryptohopper?
With Bollinger Bands on Cryptohopper, a buy signal is given when the price drops below the lower limit, and a sell signal is given when the price rises above the upper limit. This makes the Bollinger Bands indicator unique. So in a ranging market, the Bollinger Bands will make small profits since the bands are close. But in the a trending market it will make a bigger profit, since the bands are further apart.
And Bollinger Bands often work best on the hourly chart, though the performance can vary greatly from coin to coin. With that in mind, it helps to backtest and paper trade before you use this indicator with real funds. In general, Bollinger Bands work well with the MESA, since the MESA can provide the overall trend on the 1-Day or 4-Hour chart, while the Bollinger Bands can find appropriate entries and exits on the hourly chart.
I will say that the Bollinger Bands should definitely be used in conjunction with a stop loss. Otherwise, it only exits a position when the price rises again, and not at all when it falls abruptly. This can lead to large losses in a bear market if you don’t have a stop loss. Now, a take profit and trailing stop loss could also work here, however, traders should be careful and analyze the coins beforehand. Since some coins are more volatile than others, you may need a different take profit and trailing stop loss for each coins. Fortunately, you can change your settings on Cryptohopper through the Config Pools.
And that is the Bollinger Bands.
Conclusion
Phew. With that, I think we’ve covered a good amount of indicators today! Whether you favor the EMA, Williams %R, RSI, RSI with Region Crossovers, MESA, Parabolic SAR, Bollinger Bands, or one that I didn’t talk about at all today, there are a of helpful indicators out there. In my opinion, at the end of the day, the most important part is how you use them together to make a strategy.
I hope you’ve enjoyed this podcast and found it useful. If there are any other indicators you would like us to cover, please let us know! Have a great day, and we’ll see you next time.
Originally published at https://www.cryptohopper.com.
