Cryptocurrencies aren’t technically a financial asset, yet it’s famous for both traders and investors for many reasons. Bitcoin, the first virtual currency ever launched, has an average daily trading volume of 23.3 billion USD, and the incredible bull’s price is undoubtedly catching all the headlines. Whether you’re crypto curious or an enthusiast who’s FOMO to dip your feet into the hype, using technical indicators to trade is inevitable.
To get start right, you’ll first need to understand how crypto technical indicators work and how it’s being used differently from traditional markets, its categories, and functions. As we dive deeper, we’ll introduce some of the best technical indicators you certainly don’t want to miss.
Ok, but what exactly is a technical indicator?
Technical Indicators Explained
A technical explanation refers technical indicator as a trading instrument that allows a trader to calculate the trading patterns, price, or volume of past an asset to figure out how the market reacts in the short future.
Think of it this way; technical indicators help you speculate an asset’s price, including digital assets like crypto, to maximize gains.
In other words, they allow you to anticipate a price, confirm a technical analysis that another indicator is pointing out, and receive alerts from an asset’s pattern.
This way, you can forecast price movements and trends before making your final choice.
Just take note that indicators are especially useful ONLY if you understand how to use, compare, and combining them while keeping in mind your trading plan. Once you’re clear with the concept, you can easily analyze them from a one-minute chart to a weekly or monthly chart.
Main Category of Technical Indicators
First of all, technical indicators are divided into two categories depending on what they’re meant to identify. Below we have explained what each of these reveals.
A leading indicator is a technical study developed to anticipate an asset’s price action’s future movement. The idea behind leading indicators is that history is cyclical, and it tends to repeat itself. So that past price action movements can anticipate the future.
Long story short, leading indicators are conditions that, when converge, signal a particular direction in the crypto price action.
Most leading indicators can signal trend extensions and corrections. Popular leading indicators are the Relative Strength Index (RSI), the Stochastic Oscillator, and the Ichimoku Cloud.
Still, it is recommendable to use leading indicators in combination with other types of technical indicators for a more reliable signal. Also, remember that even the most popular technical indicators can not predict the future 100%.
On the other hand, lagging indicators are technical studies that provide confirmations when the current trend or movement is in progress. It means traders usually won’t take the tops or bottoms of the moves but rather double confirmation of a developing trend.
Similar to leading indicators, lagging studies are based on the assumption that history repeats itself and price actions move on cycles. The difference is that the lag between the start of the movement and the signal provides extra confidence to traders. The reason is that lagging indicators filter the market noise that occurs in short-term timeframes.
Some of the popular lagging indicators include the Bollinger Bands, Moving averages in all its versions, and the MACD indicator.
Although they provide a more confident signal, experts recommend confirming lagging indicator signals with other complementary technical studies. Also, don’t trade a call if you see particular support or resistance levels ahead of your movement.
Best Technical Indicators
When it comes to the types, there are four different technical indicators: momentum or oscillator, volume, volatility, and trend. And each of these has a subcategory.
First, they are divided because they will identify, measure, or confirm a price-performance along with a particular characteristic.
These indicators are used for stocks, forex, crypto trading, and other assets. They will be useful if you keep your trade in mind and use them at your convenience.
Momentum or oscillator indicators are used to measure the rise and fall of an asset. Typically, this indicator is more advantageous with rising markets than falling markets. You would use an oscillator indicator for a trade signal in a crypto chart.
Depending on what you need, you have the following subcategories to choose from:
1. Relative Strength Index (RSI)
RSI provides the magnitude of a bullish or bearish price. In other words, you would want to use RSI to see the momentum of a price to identify if the asset is overbought (70 or more) or oversold (30 or below). RSI is typically used in a trending market to determine the ob/os levels through price movements’ momentum. Most of the time, traders benefit from this indicator because it’s useful to decide on time entries, trends, support and resistance.
2. Stochastic Oscillator
On the other hand, this oscillator helps to compare the closing price of a cryptocurrency or another security to a spectrum of its prices during a specific time period. It is beneficial if you would like to have signals of bullish or bearish trends or even to generate overbought and oversold trading signals.
Typically, you would want to adjust the time period or use a moving average to reduce the oscillator’s sensitivity to the market movement. As a range-bound (0 and 100), Stochastic is usually depicted in a chart with two lines representing the oscillator’s actual value for each session and its three-day simple moving average.
While Stochastic can be used in tandem with RSI, it’s distinguished by its predicament on the closing prices where it should come in the same direction as the current trend.
MACD stands for Moving Average Convergence Divergence. With this indicator, you can compare two moving averages. The relationship between these two will allow you to understand why a price movement is getting stronger or weaker.
It is important to note that convergence is when these two moving averages start to move closer to each other and decrease in momentum. On the other hand, divergence would be the opposite, so momentum would be increasing while the moving averages are distancing.
Typically, MACD can be used in conjunction with RSI. But it’s also one of the best technical indicators for swing trading.
4. Ichimoku Kinko Hyo
This technical indicator was born in Japan, and it works better on crypto graphics that show weekly or monthly activity. That is because it uses four different time intervals. One of these is calculated using the average price between the maximum and interval of a minimum, divided in half.
This indicator is beneficial if you want to understand the market movement of the given cryptocurrency. If you see the real-time price is higher than the indicator, it will probably continue to rise.
5. Commodity Channel Index
The Commodity Channel Index is an oscillator indicator that measures the variation between the current price and the average historical price. Traders could use this indicator to benefit when they want to know if the price will be above or below a historical average, meaning that it can continue moving in the direction the indicator measured.
Volume indicators are another category of technical indicators you can use to increase profit and minimize risk. You can have entry and exit signals once you associate them with the correct formula since each indicator uses a different one.
Below we will explain the subcategories of these indicators:
6. Average Volume
You can calculate the volume moving average, a time period of a minimum of 14 days to weeks. It is measured by taking a specified period in the crypto chart and dividing it by the number of bars in that same period.
7. Volume Momentum
This specific indicator will try to find the change in an asset’s volume during a particular time. With this, you will see how a securities’ price has changed comparing the volume change to the starting price. The volume will depend if the crypto asset opened or closed negatively or positively.
8. Chaikin Money Flow
Chaikin Money Flow will help you know when there is an overbought or oversold position in the financial market. They will calculate the value of the strength of the asset you are looking at by analyzing the inflow or outflow during a period of time. Usually, you will need at least 14 periods of price data to have the final measurement.
9. Force Index
Will measure the power of either the decrease or increase of an asset. In other words, it will show you the price change, whether it is bullish or bearish. The force index comprises three parts: the direction, range of the price change, and the trading volume. If the market is buoyant, the indicator will be too, thus being over the centerline.
In this case, the direction does not matter when this indicator is measuring the price movement. You can use these to know the points where the market might change directions according to the highest and lowest historical security prices.
10. Bollinger Bands
Bollinger bands are one of the most popular indicators. But what you may not know is Bollinger bands do not tell you the direction of a breakout. Instead, it is used to identify market volatility and the heavily transacted areas. Hence, to signal you that a breakout is about to happen.
With this, you will use the previous trades to know the highest or lowest points of an asset. According to the distance, the bands show there will indicate volatility. When the bands are farther apart, it means that volatility has increased. If the bands are closer together, then it indicates less market volatility.
11. Average True Range
As a volatility indicator, ATR shows how much an asset moves, on average or during a given time frame. Although the price trend will not be calculated, you will know the degree of volatility in an asset’s price. Mainly by utilizing this indicator to look at price gaps. Again, ATR does not concern with the price direction, but rather to identify the volatility of the market. For example, a day trader would use ATR to confirm when they want to initiate a trade and also to put a stop-loss order.
At first, the indicator was for commodity markets, but it is now used for all other securities like stocks and cryptocurrencies.
12. Parabolic Stop and Reverse
Also known as the Parabolic SAR indicator, you can use this to conclude the price’s trend direction and a possible reverse in prices. As the name might imply, this indicator uses stop and reverse to determine entry and exit points. The Parabolic SAR is one of the best technical indicators for day trading.
13. Keltner Channel
The Keltner channel consists of three lines where the middle one is the exponential moving average or EMA, which follows recent price changes. The upper band shows bullish trends while the lower band indicates bearish. A channel-like appearance forms when all three of lines are plotted based on the volatility and average prices of an asset.
Trend indicators will measure which way the market is moving and what trend it presents. This way, the asset’s momentum should help you speculate if the direction will continue moving in your favor.
14. Volume Indicator
The volume indicator will compare the security’s demand versus its supply. It is beneficial for traders who need to know what the force is behind the price trend. The concept is simple, just think of it this way:
When there’s an increase in trading volume, it’s interpreted as a healthy market. Which then signals you that the market is active. On the contrary, when prices fall on increasing volume, the trend is gathering strength to the downside.
All in all, you will know when the market is gaining strength and increasing all by analyzing the trading volume.
15. Moving Averages
Moving averages will always keep you updated on the asset’s average price. You will visualize this indicator as a line on a chart that will take over any time period a trader decides. It can be a time period from a few minutes or many weeks.
There are different types of moving averages that are calculated on price events: Simple Moving Average (SMA), Exponential Moving Average (EMA), Smoothed Moving Average (SMMA), and Linear Weighted Moving Average (LWMA).
Generally, the 21-day MA commonly marks the short-term trend, the 50-day MA for intermediate trend, whereas 200-day MA is for the long-term trend of the market. But what’s most interesting about moving averages is, while trendlines can be subjective, MA is unbiased based on its trend indicator.
Things to Know Before Trading with Technical Indicators
As you know, technical indicators can be used to analyze different securities such as commodities, forex, stocks, and of course, cryptocurrency. Including indicators in your strategy can help you decide if you want to make the trade you have in mind. In fast-moving markets such as cryptocurrencies, it is crucial to identify signals or trends because timing is key.
Still, there are few things you must know!
Combine and Compare The Indicators
Firstly, even the best technical indicator can be used together or compared to each other, but there is a limit. Up to two or three is acceptable since more will only leave you helpless. When you know your trading goal, and what you need to know, it is time to choose indicators that will show you different signals. Perhaps, use complementary indicators (those that present different views of the market while working collectively to provide meaningful data on which to base trading decisions.)
Always Have A Plan
Sure you can just wing it and be spontaneous. But, you must always keep in mind what your trading plan is for the worst-case scenario. That way, you can choose the correct indicators and implement them according to your needs. Plus, the signals you get from the indicators you choose should confirm each other.
In the financial world, knowledge is what will guide you to increase your profit and stay away from losses. That is why you must learn what each indicator is for and how it can benefit your financial speculation.
Knowledge should also be complemented by being able to control your emotions in stressful situations. If an indicator shows you that the price is going the wrong way, it is essential to act calmly and follow your trading plan.
Never Over Expect
Technical analysis is all about probability. That means, even the most accurate technical indicators can give a mixed signal when used in isolation. In any case, the best way to mitigate such issues is to use a different combination of indicators to help you determine ideal entry and exit signals.
While the fundamentals are pretty much the same, still the validity of the technical analysis may be contracting from one analyst to another.
Technical indicators are tools that will calculate patterns, an average trading volume, or the price of a security. They will help you maximize gains if used correctly. There are two main categories of indicators: leading and lagging.
Then there are four types of indicators, including the momentum or oscillator, volume, volatility, and trend. Each of these is then sub-divided into other categories that have specific characteristics and measurements.