The 11 Best Technical Indicators for Cryptocurrency Trading (2023)

The cryptocurrency market has certainly grown over the past decade, with more and more users coming onboard, including key institutional players. Bitcoin, the first cryptocurrency ever created, has a daily trading volume of USD $13.2 billion as of April 6, 2023. This positions the cryptocurrency market to be of interest for traders to capture its volatility.

To get started on this cryptocurrency trading journey, we’ll first want to understand what different types of cryptocurrency technical indicators are available for traders to use.

What Are Technical Indicators?

​​Technical indicators are mathematically based calculations used by traders to analyze financial markets — including cryptocurrencies — and make informed trading decisions. Past prices and volume data and are used to identify trends, patterns and potential price movements in the market.

There are several different types of technical indicators to measure trend, momentum, volatility and volume. Each indicator has a unique formula or algorithm that takes into account different market data points, such as price, volume and time, to provide information about market conditions.

Traders use technical indicators to generate buy or sell signals, identify potential entry and exit points and manage risk. Technical analysis is often used in conjunction with fundamental analysis and market sentiment to make informed trading decisions.

Main Categories of Technical Indicators

First off, let’s understand the two main categories of technical indicators: (1) leading indicators, and (2) lagging indicators.

Leading Indicators

Leading indicators provide signals that can predict future price movements. They’re called leading indicators because they’re based on current market conditions, and can provide early signals of potential trend reversals and trend extensions. In other words, the change or constant price direction can be predicted. The concept of leading indicators is that history is cyclical and tends to repeat itself.

Popular leading indicators include the relative strength index (RSI), stochastic oscillator and Ichimoku Cloud.

However, it’s recommended to use leading indicators in combination with other types of technical indicators for a more reliable signal, as even the most popular technical indicators are unable to predict the future with 100% accuracy.

Lagging Indicators

Lagging indicators provide signals that confirm trends which have already occurred. They’re called lagging indicators because they’re based on past market data, and are thus unable to predict future price movements. Similar to leading indicators, lagging indicators are based on the assumption that history repeats itself and price actions move in cycles. 

The difference between leading and lagging indicators is that the lag between the start of a price movement and its signal filters market noise that occurs in short-term time frames, providing extra confidence for traders. In addition, lagging indicators are typically not used by traders to take the tops and bottoms of moves, but rather used as a confirmation of a developing trend.

Examples of lagging indicators include moving averages, Bollinger Bands® and moving average convergence divergence (MACD).

Although lagging indicators provide more confident signals, experts recommend confirming them with complementary technical indicators. It’s also not recommended that you carry out a trade if there are particular support or resistance levels ahead of the movement.

Best Technical Indicators

There are four different types of technical indicators: momentum (or oscillator), volume, volatility and trend. They’re categorized because they identify, measure or confirm a price performance along with a particular characteristic. Under each category there are several particular technical indicators traders frequently use.

Momentum/Oscillator Indicators

A momentum or oscillator indicator is a type of technical indicator that measures the rate of change in an asset's price over a specified period of time. Momentum indicators are used to identify the strength of a trend and potential trend reversals.

Some of the more popular momentum indicators are RSI, stochastic oscillator, MACD, and Commodity Channel Index.

1. Relative Strength Index (RSI)

The RSI is one of the most popular momentum indicators used by traders to measure the strength of an asset’s price action, ranging from 0 to 100. An RSI below 30 indicates an oversold momentum in which the asset’s price is likely to experience an upward trend reversal. On the other hand, an RSI above 70 indicates an overbought momentum, as an asset’s price is also likely to experience a reversal trend in which the price corrects.

This is a useful indicator for identifying changes in trends from upward to downward momentum, and vice versa. Most of the time, traders use the RSI to identify trends and support and resistance levels, and to time their entries.

It should be noted that RSI works relatively well during a range-bound market, but tends to give false signals during trending markets.

2. Stochastic Oscillator

The stochastic oscillator compares a cryptocurrency’s closing price to its price range over a specified period of time. This is an indicator that helps traders identify market momentum and signal overbought and oversold market conditions.

Similar to the RSI, the stochastic oscillator ranges between 0 to 100. When the reading is below 20, a cryptocurrency is considered oversold, which serves as a buy signal for traders. On the other hand, when its readings are above 80, it’s likely that a cryptocurrency is overbought, serving as a sell signal for traders.

However, the stochastic oscillator is prone to false signals during volatile market conditions. Traders can use this indicator together with the moving average (will be described in more detail later) to improve the signal’s accuracy. 

3. Moving Average Convergence Divergence (MACD)

The MACD is mainly used to identify potential trend reversals and momentum shifts in the market by comparing two different moving averages (MA) of the cryptocurrency. 

When two MAs are moving toward each other, it represents a decrease in momentum and is often indicative of potential price decrease. Likewise, when the MAs diverge, it indicates a pickup in momentum, which is viewed as a bullish signal.

Traders can also identify potential divergences between MACD and a cryptocurrency’s price. For example, if the MACD line is making higher highs while a cryptocurrency’s price is making lower highs, it could be an indication that the upward momentum in the cryptocurrency’s price is weakening, and traders can start watching out for a trend reversal.

4. Commodity Channel Index (CCI)

The Commodity Channel Index is an oscillator indicator that measures the deviation between a crypto’s current price and its average historical price. When the CCI is above +100, it suggests that the cryptocurrency is overbought, while readings below −100 suggest that the cryptocurrency is oversold. Based on the information received from the CCI, traders can identify entry and exit points for their trading positions.

Volume Indicators

Volume technical indicators are tools used by traders to analyze the trading volume of a cryptocurrency in a given period of time. Volume indicators can be used to confirm trends, and to identify potential trend reversals and breakouts.

5. On-Balance Volume (OBV)

On-balance volume (OBV) is a cumulative indicator that measures buying and selling pressure based on the volume of trades. It’s calculated by adding the volume on up days and subtracting the volume on down days. A rising OBV indicates buying pressure, while a falling OBV suggests selling pressure.

If both the price movement and OBV are heading in the same direction, the trend direction is determined to be confirmed. For example, if both the cryptocurrency price and OBV are increasing, it indicates buying pressure within the market and a potential market rally. However, if the price movement and OBV are heading in different directions, it represents market confusion.

It should be noted that OBV is prone to giving inaccurate signals when there are huge spikes in volumes caused by external events, such as major announcements. 

6. Chaikin Money Flow (CMF)

CMF is typically used to identify potential trend reversals or to confirm existing trends. It’s based on the concept that the increase in the price of a cryptocurrency — when accompanied by high volume — indicates buying pressure. Similarly, a decrease in the price of a cryptocurrency on high volume represents selling pressure.

The CMF oscillates above and below a zero line, with positive values indicating buying pressure and negative values indicating selling pressure.

7. Volume Weighted Average Price (VWAP)

This indicator is often used by traders to identify potential entry and exit points in the market by identifying support and resistance levels. VWAP calculates the average price of a cryptocurrency based on its trading volume, which is then plotted as a line on a chart. This then depicts the average price at which a cryptocurrency has traded throughout the day.

When a cryptocurrency is trading above the VWAP, it suggests an uptrend. If the price of a cryptocurrency falls below the VWAP, it suggests a downtrend. If a cryptocurrency is in an uptrend, traders will tend to open a long position, and if a crypto is in a downtrend, they’ll open a short position.

Volatility Indicators

These indicators are used to measure the degree of price fluctuations experienced by a cryptocurrency over a specific period of time, to identify potential trend reversals and market tops or bottoms, and to determine the level of risk associated with a cryptocurrency.

8. Bollinger Bands

Bollinger Bands® are a technical analysis tool developed by author John Bollinger to show the price range in which a cryptocurrency typically trades. Traders frequently use this indicator to identify potential entry and exit points in the market.

Bollinger Bands consist of three lines: a moving average, an upper band and a lower band. The bands are based on the standard deviation of an asset's price over a specified period of time, and are used to identify potential breakout points. When the price of an asset approaches the upper band, it may be overbought, suggesting that it’s time to sell the asset. Conversely, when the price approaches the lower band, it may be oversold, suggesting that it’s time to buy.

Bollinger Bands can also be used to identify potential trend reversals. If the price of the asset breaks through the upper band, it may be a sign that an uptrend is continuing. If the price breaks through the lower band, it may be a sign that a downtrend is continuing.

These bands' expansion and contraction can be used to gauge a cryptocurrency's price volatility. The perceived price action of an item is reduced as the bands converge and become smaller. This frequently denotes a lesser likelihood of volatility. On the other hand, the market expects higher volatility as these bands move farther apart.

It’s generally better to use longer time frames for Bollinger Bands, as shorter time frames will often create false moves and noise.

9. Average True Range (ATR)

Average True Range (ATR) is used to quantify a cryptocurrency’s volatility over a given time frame. It’s based on the concept that price moves frequently follow periods of market volatility.

The true range (TR) of a cryptocurrency is averaged over a predetermined amount of time to determine the ATR. The largest of the following values represents the true range:

• The difference between the current high and the current low.

• The difference between the current high and the previous close.

• The difference between the current low and the previous close.

To locate probable levels of support and resistance, the ATR is shown as a line on a chart. An asset is thought to be experiencing high levels of volatility when the ATR is high, whereas a low ATR indicates that an asset is experiencing low levels of volatility.

Trend Indicators

Trend indicators are utilized to determine a market trend's direction. They’re employed by traders to help assess trend strength and detect the possibility of trend reversals.

10. Volume Indicator

The amount of trading volume for a cryptocurrency indicates its level of activity. An increase in trading volume is reflected as a pickup in market activity, and is usually interpreted as indicating a healthy market. On the other hand, a dwindling level of trading volume for the cryptocurrency reflects a decrease in market activity.

This relative strength of the market helps traders decide whether or not they should open a position or it’s time to exit their position.

11. Moving Averages

Moving average is a visualized calculation of the average price of a cryptocurrency over a specified period of time. It’s a tool that’s used to identify the direction of trend in a cryptocurrency’s price movement. 

There are different types of moving averages, including simple moving average (SMA) and exponential moving average (EMA). A simple moving average is calculated by adding the closing prices of an asset over a specified period of time and dividing the sum by the number of periods. An exponential moving average’s calculation gives more weight to the most recent prices.

Moving averages are used to smooth out price fluctuations and identify a trend’s direction. When the price of an asset is above the MA, it suggests an uptrend, while a price below the MA suggests a downtrend.

Traders use moving averages to identify potential entry and exit points in the market. For example, if the price of an asset is above its MA, a trader may consider buying the asset. Conversely, if the price is below its MA, a trader may consider selling the asset. Traders also use moving averages as areas of support and resistance.

Generally, a 21-day MA commonly marks a short-term trend, a 50-day MA an intermediate trend and a 200-day MA a long-term trend in the market. 

Since a simple moving average smooths out the price action and changes direction less quickly, it’s more beneficial for long-term traders. Given that the exponential moving average (EMA) is more sensitive to price changes, it will be useful for short-term traders to catch price action changes over the shorter term.

What to Know Before Trading With Technical Indicators

As we’ve described in the above sections, there are a variety of technical indicators that can be used by traders to identify trend reversals and areas of entry and exit, and for other use cases. Here are just a few more things to know about technical indicators.

Combine and Compare the Indicators

It’s often recommended that technical indicators be used in conjunction with each other to confirm trends. Up to two or three is optimal, as using too many introduces noise and can leave you at a crossroads, not knowing which direction to go.

Conclusion

In this article, we examined two main types of technical indicators, leading and lagging. We then looked at the different categories of indicators, including momentum, volatility, trend and volume. Then, we explored the various types of indicators that are frequently used by traders within each category.

We recommend you consider adding these indicators to your trading to see whether they help improve your reward-to-risk ratio. And, as always, exercise proper risk management.