Volatility makes trading in the crypto market very risky, but also potentially profitable. Successful crypto traders rely less on luck and more on technical, financial knowledge. If you’re looking to start trading, here is something you definitely need to learn. It’s called cryptocurrency indicators, and they could mark the difference in your portfolio balance.
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A brief definition of cryptocurrency indicators
Crypto traders spend hours looking at price charts to try and identify patterns and trends on them. Their goal is to predict as accurately as possible how a given cryptocurrency will perform in the future to make a profit out of it. That is called technical analysis (TA), and it is a standard methodology among experienced traders. But when we say “looking at charts”, what are they looking at exactly?
Besides price candles, charts can show what we call trading indicators. These are calculations based on the past price action, trading volume, open orders and any kind of information regarding a particular asset. They usually appear as lines across the chart and vary according to the timeframe you’re looking at. Exchanges like Binance or FTX use them in their trading charts to provide traders with a more advanced interface.
What are indicators for?
As we said, indicators are a tool to predict movements on a given crypto price. However, that’s a rather simplistic definition. Let’s further explain that.
The market records and processes a tremendous amount of information each minute: trades performed and at which price, trading volume, asset price action and patterns, open orders on derivatives, etc. It is virtually impossible to keep up with all that data. Hence, indicators come in to synthesize all that information and provide a cleaner, easier way for traders to read and analyze it.
However, there are many types of indicators. Each of them for different purposes. Some of them help predict the direction price is going. Others are useful for identifying potential buy and sell opportunities and support and resistance areas. You should take some time to carefully choose which one suits your plan best.
In the Pro version of The Crypto App, you have access to widgets that allow you to see price charts on your home screen, in real-time and with several indicators. Download the app and go Pro here.
Popular cryptocurrency indicators
As we said, there are many types of indicators. Let’s dive into some of them to establish the differences between them.
- Relative Strength Index or RSI: This indicator is used to determine price momentum. It is visually represented across the chart as a single line ranging between 0 and 100. Basically, if RSI indicates a value of 70 or above, it means that the asset is overvalued and signals a sell. On the contrary, 30 or below suggests it’s undervalued, signalling a buy.
- Moving Average or MA: An MA identifies the direction of a price trend. It combines the price of an asset through different points over a time period. Then, it divides them by the number of points evaluated, drawing a line through them. Besides predicting future movements, it also serves the purpose of recognizing possible support and resistance levels.
- Moving Average Convergence Divergence or MACD: MACD is a little more complex. In the simplest terms, it compares two moving averages to detect changes in momentum. When moving averages are converging or getting closer together, it means the trend is losing strength. Viceversa, when they are diverging or drifting apart, it suggests momentum is increasing. In addition, this indicator is also helpful for signalling buying and selling points.
- Bollinger Bands: Unlike the previous indicators, Bollinger Bands determine the range in which an asset is expected to trade. Its principal use is to predict whether that asset will be affected by volatility. It can’t forecast if the price will go up or down. However, knowing the impact of volatility has many benefits. You take advantage of it providing liquidity to a stablecoin pair or use it as collateral to take out a loan in a DeFi platform.
Don’t always trust indicators
Cryptocurrency indicators are an excellent tool to elaborate a plan of action. Nonetheless, they’re not the only way of analyzing an asset’s performance. Aside from technical analysis, there is fundamental analysis, narrative investing and many other methods to determine where to put your money.
If you’re going for technical analysis and are using trading indicators, make sure you select the most representative for your goals. You should also try to find confirmation. For example, MACD could show a sell signal, but the price chart could still look bullish. In that case, you should adjust the time frame or use another indicator until you get a clear, indisputable signal.
Finally, remember that absolute certainties don’t exist in crypto trading. Black swan events, pump and dump schemes or outside world news can and will have significant impacts on an asset price. No indicators can predict those. The best way to protect your investments from those kinds of circumstances is to stick to your plan and take profits progressively. Do that, and there’s no doubt you’ll make it.