In order to know, Best indicators for crypto trading firstly we have to know about crypto trading.
Crypto trading refers to the buying and selling of cryptocurrencies, such as Bitcoin, Ethereum and other cryptocurrencies, different online exchanges like Binance. Crypto traders aim to make a profit on daily basis by buying cryptocurrencies at a lower price and selling them at a higher price.
Traders use a variety of strategies when trading cryptocurrencies, such as technical analysis, fundamental analysis, and algorithmic trading. Technical analysis involves studying chart and market data to identify patterns and trends, while fundamental analysis involves evaluating the different factors that could impact the price of a cryptocurrency. Algorithmic trading involves using computer programs to automate the trading process based on particular rules.
And also, there are some risks involved in crypto trading, such as the high volatility of cryptocurrency prices, less knowledge of trading fundamentals, the risk of fraud or hacking, and the lack of regulation in the crypto market. It’s important for traders to carefully consider these risks and to take steps to manage them, such as by diversifying their portfolio, using stop-loss orders, and not risking more money than they can afford to lose.
In order to become a successful trader it is very important to control the emotions and keep the emotions aside from the trading. And some tools (which are popularly known as indicators) are also available to make the trader’s journey easy and smooth.
Do technical indicators work for crypto?
Yes, but only 60% – 85%. Technical indicators just predict the movement of market and forecast the crypto coin’s future price movement by past tends and patterns. However, the cryptocurrency market is still a relatively young market with small history of past market data, makes big challenge for indicators to predict.
However, few indicators works good in crypto’s market instability. For instance, the On-Balance-Volume (OBV) is a generally trustworthy momentum indicator to forecast breakout directions. It can also help track down money flow from institutional investors or prominent market players. It concentrates on the collected exchanging volume of a digital currency over the earlier days, weeks, and even months. It measures the crypto trading pressure.
If there is increase in OBV (On-Balance-Volume), that means traders are looking to make a buy of crypto coins. And decreasing OBV indicates that traders are going to sell or short the assets or in other words, there is selling pressure is in the market.
Now we will learn about the Best indicators for crypto trading..
Moving Average (MA)-
Moving Average is simple and straight forward indicator. It is lagging indicator because they follow the trend and provide delayed feedback after the price movement has already occurred. It is used to find the present trend and predict the market price movements.
There are four types of Moving Averages: 1. Simple Moving Average (SMA) 2. Exponential Moving Average (EMA) 3. Smoothed Moving Average (SMMA) 4. Weighted Moving Average (WMA) We will learned about SMA & EMA only because these are the mostly used indicators in Moving Averages.
1. Simple Moving Average (SMA)
This SMA is widely used indicator in crypto trading. It is one of the type of Moving Average which is calculated by taking the average of previous closing prices. It is often used to identify the present trends of crypto market and also used to draw the support and resistance levels. By using SMA indicator, a trader can calculate the price of cryptocurrency.
For example, if you want to calculate a 50-day SMA for a particular crypto, you would add up the closing prices for the past 50 days and divide the result by 50. The resulting average is plotted on a chart, and can be used to identify trends and possible entry and exit points for trades.
The formula for calculating SMA:
SMA = (P1 + P2 +…..+ Pn) / n
where; P is the closing price (P1: closing price of day 1 ; Pn: closing price of nth day) n is the number of days
The SMA indicator changes its position the moment a new candle shows up.
2. Exponential Moving Average (EMA)
It is also the most used Moving Average indicator. It is calculated by giving the more weightage to the recent price and less weightage is given to older prices.
Generally, the EMA is used with some other technical indicator to confirm the trend direction. It is also used to identify the support and resistance.
The formula for EMA calculation:
EMA = Pp + [K × (Cp − Pp)]
Where: Cp = Current price Pp = Previous period’s EMA (SMA is used for the first period’s calculations) K = Exponential smoothing constant (this gives the appropriate weight to the most recent prices, utilizing the specified period in the MA)
- If EMA 9 crosses above EMA 20 (Slope upwards) – Uptrend
- If EMA 9 crosses below EMA 20 (Slope downtrends) – Downtrend
Price above EMA 50 (Strong Uptrend)
Price below EMA 50 (Strong downtrend)
Buying When –
- EMA 9 is above EMA 20
- EMA 9 and EMA 20 are above EMA 50
- Price are above EMA 9, EMA 20 and EMA 50
Moving Average Convergence Divergence (MACD)-
MACD indicator is a momentum and trend following indicator that shows the relationship between two Moving Averages of a crypto’s price. The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. A nine-day EMA of the MACD, called the “signal line,” is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.
Traders may buy the security when the MACD crosses above the signal line and sell (or short) the security when the MACD crosses below the signal line. The MACD histogram is a visual representation of the difference between the MACD line and the signal line. When the MACD is above the signal line, the histogram is positive and above the centerline, which indicates that the security is in an uptrend. When the MACD is below the signal line, the histogram is negative and below the centerline, which indicates that the security is in a downtrend.
Relative Strength Index (RSI)-
The Relative Strength Index (RSI) is a technical indicator used to analyze the crypto and financial markets. The indicator was originally developed by J. Welles Wilder and introduced in his 1978 book “New Concepts in Technical Trading Systems.” In this indicator there is a line graph that oscillates between a range have a reading from 0 to 100.
Generally, the range is set between 30 to 70. The RSI is considered to be overbought when it is above 70 and oversold when it is below 30.
To calculate the RSI, you first need to determine the average gain and the average loss over a given period. The RSI is then calculated using the following formula:
RSI = 100 – (100 / (1 + (average gain / average loss)))
Sometimes, it is considered as the best momentum indicator.
In 1980s, John Bollinger developed a technical analysis tool which is know as Bollinger Bands. Bollinger Bands consist of three lines: a lower band, an upper band and a middle band. The middle band is a Simple Moving Average (SMA) of the prices. And the upper and lower bands are drawn a certain number of standard deviations above and below the middle band. Standard deviation is a statistical measure of the dispersion of a dataset relative to its mean, and it can give an indication of the volatility of the prices.
Bollinger Bands are commonly used to identify overbought and oversold conditions in the market. When the price touches the upper band, it is considered overbought, and when it touches the lower band, it is considered oversold. Some traders also use Bollinger Bands to identify breakout trades, by looking for price action that breaks above or below the bands.
The lower Bollinger band addresses the negative standard deviation. This region shows the hidden cost is contracting curiously, and it’s a decent sign that it very well may be oversold. As the bands expand, the sign is that the market is turning out to be more unpredictable(volatile) as costs get away from the slacking(lagging) 20 MA. As bands contract, the market might become less volatile.
In 1930s, a Japanese journalist named Goichi Hosoda developed a tool known as Ichimoku Cloud. Ichimoku Cloud is also known as the Ichimoku Kinko Hyo. It is a technical analysis tool that is used to identify the trends of market and also used to find the support and resistance level in the financial or crypto market.
The Ichimoku Cloud consists of five lines, which are displayed on a chart as a cloud-like shape.
- Conversion Line (Tenkan-sen)
- Base Line (Kijun-sen)
- Lagging Span Line (Chikou Span)
- Leading Span A (Senkou Span A)
- Leading Span B (Senkou Span B)
These lines are:
- The Tenkan-sen, which is the conversion line and represents the average of the highest high and the lowest low over the past 9 periods.
- The Kijun-sen, which is the base line and represents the average of the highest high and the lowest low over the past 26 periods.
- The Chikou Span, which is the lagging line and represents the current closing price shifted back 26 periods.
- The Senkou Span A, which is the leading line A and represents the average of the Tenkan-sen and the Kijun-sen, shifted forward 26 periods.
- The Senkou Span B, which is the leading line B and represents the average of the highest high and the lowest low over the past 52 periods, shifted forward 26 periods.
The area between the Senkou Span A and Senkou Span B is shaded to create the “cloud,” which is also known as the Kumo. The Kumo is used to identify the trend and to identify support and resistance levels. If the price is above the cloud, it is considered to be in an uptrend, and if it is below the cloud, it is considered to be in a downtrend.
There are several ways to use the Ichimoku Cloud in trading, such as looking for crossovers between the Tenkan-sen and Kijun-sen, or looking for breaks above or below the cloud to identify potential trades. As with any technical indicator, it is important to use the Ichimoku Cloud in conjunction with other analysis techniques, and to not rely on it too heavily.
It’s important to note that no single indicator (Best indicators for crypto trading) is perfect, and it’s usually best to use a combination of indicators to get a more comprehensive view of the market. It’s also important to backtest your trading strategy and fine-tune your indicator settings to make sure they’re well-suited to the market you’re trading in.