When you first go down the cryptocurrency rabbit hole, you might find yourself overwhelmed with new technical terms and conflicting advice. Cryptocurrency indicators are no different, but hopefully, this article can help you dip your toe into some new terms, and ease yourself into things. First, we will go through what are crypto indicators, how you can use them to become a successful crypto trader, and the best crypto indicators to use for cryptocurrency.
Overview Of Cryptocurrency Indicators
As a brand new or aspiring crypto trader, the use of technical indicators (through technical analysis) is very important to understand in order to be successful. They are used by traders to analyze a particular stock or currency (fiat or crypto) in order to predict the price, identify new trading opportunities, and indicate whether to exit a position or not. This is very different from something called ‘fundamental analysis’ which concentrates more on determining the value of a currency or stock through the use of identifying competitors, assets, and a variety of other things.
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There are various methods of technical analysis that may use a combination of key indicators to predict the price. But, cryptocurrency is a new market, and by design, extremely volatile and unpredictable. With each new method comes criticism and praise, and most are very controversial.
Here are some key phrases to keep in mind:
Identifying the value of a currency or stock through analysis of competitors, assets, etc. We won’t be going further into fundamental analysis in this article, instead, we’ll concentrate on indicators that are utilized during technical analysis.
Technical Analysis (TA)
The analysis of statistical trends associated with a particular stock or currency gathered from trading data, including volume or price.
Technical/ Key indicators
‘Signals’ or mathematical calculations that record or measure volume, price, momentum, etc. It can be things like price patterns or chart formations. Traders use them to determine buy/sell times and predict the price of a cryptocurrency (in this case, however, they are used in stocks and other financial asset trading).
Why Use Technical Crypto Indicators?
Technical indicators are generally used to create a visual image of the trends in the price of a currency. It allows traders to look at trends in price from different viewpoints formats. It’s important to remember that indicators cannot precisely forecast future prices, rather present past prices to identify trends and allow for price estimates.
Indicators, however, do not make or break a successful trader. Many don’t use them, and many swear by them. It’s a very controversial topic, and as you begin to research more, it’s entirely up to you to decide whether you’ll be using indicators to aid your trading in the future.
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When choosing your preferred format, it’s really down to preference. What works for you might not work for another trader. Don’t worry, though; we are going to walk through some of the most popular methods and talk about their benefits.
Especially at the beginning, it’s advisable to keep the number of different indicators you’re looking at to a minimum, in order to avoid confusing yourself. Best to look at one or two at a time to start with.
So, let’s take a look at some of the best indicators to use for cryptocurrency trading.
1) Relative Strength Index
A beginner-friendly video explaining how to use the relative strength index.
The relative strength index is one of the indicators that can be used by both experienced traders and absolute beginners. As one of the more popular and well-known indicators, it quantifies the losses and gains of an asset (in this case cryptocurrency) over a specific period of time.
RSI is characterized as a momentum indicator. It has a scale between 0 and 100, which measures the change of price movement over a 14-day period. However, it can also be adjusted to measure longer timeframes as well. RSI can indicate two things; whether a currency has been overbought or under bought, and whether it is in a bullish or bearish phase.
- Overbought: indicates a possible sell opportunity.
- Oversold: indicates a possible sell opportunity.
- Bullish: associated with rising prices.
- Bearish: associated with falling prices.
When the RSI is over 70 it indicates the currency may be overbought and if it is under 30, undersold. It is very useful for traders as it can show the trend of overselling and overbuying of a particular currency in a simple visual representation. However, you shouldn’t take the RSI, or any indicator, as gospel, and no indicator can predict price 100%.
2) Bollinger Bands
Here is an extremely useful guide to Bollinger bands!
Nearly as well known as the relative strength index, Bollinger bands record the volatility of a currency or asset at any given time. They were created by a man named John Bollinger in the ’80s and are named after him. According to Bollinger, periods of low volatility are followed by periods of high volatility and vice versa, which is how the bands can be used to indicate the future market.
When you look at a Bollinger band chart, you will see a middle line, the simple moving average, bracketed by two lines above and below plotted two standard deviations away. When the bands are wide, the volatility is high, and when they constrict, the volatility is low. Traders use Bollinger bands to indicate how overbought or oversold the market is, in order to signal good buying or selling opportunities.
Bollinger bands, like most other indicators, are reactive rather than proactive. Meaning they can show you current price trends, but cannot accurately predict the future price.
3) Simple Moving Averages
This video explains the standard moving averages crypto indicator to great detail.
The simple moving average is a representation of an asset’s price over a certain period. By the addition of a closing price divided by the number of periods, the simple moving average can indicate new opportunities and trends. This indicator is very popular among traders as it can be adjusted over a longer or shorter period. Also, it can signal buying and selling opportunities.
In this article, we’ve gone through what technical indicators are, what traders use them for and some of the best indicators to use for cryptocurrency. There are dozens more out there, and during your research, you will likely come across many discrediting indicators, and many singing their praises. It’s best to keep in mind that what might work for you may not work for others. It comes down to your currency, strategy, time limits, and more.
Indicators can be great tools to show trends in the market, tell you when an asset is oversold or overbought, and give strong buy or sell signals. You can use a combination of different indicators, or stick to just one. Though, we do recommend you don’t look at too many at once, as it can muddy your charts and make it harder to interpret the results. Hopefully, this has been a valuable introduction to some popular indicators, and how you can use them to be a better trader.