4 categories of technical indicators you can use in Crypto Trading

Finding a technical indicator that works for you takes a lot of study and practice, a process that can be quite overwhelming, especially for new traders. Beginner traders usually try different indicators to see how they work, as they may find it difficult to know which ones to use for specific market situations and needs. For this reason, we have listed four categories of indicators that you can use based on your specific needs. After reading, you will be able to know which indicator to use for what.

Use Technical Indicators

In technical analysis, crypto traders try to determine the current trend and price movement and want to find the right market entries and exits. To achieve this, they often use different indicators to check market trends, volume, volatility and momentum. They then use the result of their analysis to determine their next course of action.

One of the challenges you face when trying to do this is finding the right indicator for whatever purpose you want. For example, knowing the right indicator to weigh trading volume during a breakout to know if the trend is strong. Knowing the right indicator to use for specific purposes and at the right time can help you get more accurate market information.

4 Categories of Indicators Used in Crypto Technical Analysis

Let’s take a quick look at four popular categories of technical indicators and some examples for each.

1. Trend indicators

Traders use trend indicators to determine whether the market is bullish, bearish or consolidating. A market is bullish if the price continues to rise for a long time, and if it is bearish, it continues to fall. A consolidating market has a sideways movement, meaning the price is neither bullish nor bearish.

Below are some popular indicators that traders use to determine market trends:

Moving averages

Moving averages can be used to determine long-term and short-term market trends. To determine short-term market trends, you can use the 50-day moving average and below, while you should use the 50-day moving average and above to perform long-term trading analysis. The price is usually above the moving average in a buyer’s market (bullish trend) and below the moving average in a seller’s market (bearish trend).

You can use a shorter and longer period MA in the same chart. When the shorter period moving average crosses above the longer period moving average, the bulls have taken control. On the other hand, if the shorter MA moves below the longer MA, the market has turned bearish.

MACD (Moving Average Convergence/Divergence)

The MACD shows the strength of the stronger trend along with signals of the changing trend. The indicator consists of the MACD line and the signal line. The MACD line is derived from the difference between two exponential moving averages (EMA): the 12 EMA and the 26 EMA. While the signal line is 9 EMA.

The MACD line moves as the price moves and oscillates around and below zero, the baseline. When the MACD line is below the baseline, it represents a bearish trend, while when it is above the baseline, it is a bullish trend. Additionally, when the MACD line crosses above the signal line, it is taken as a bullish signal, and when it crosses below the signal line, it is taken as a bearish signal.

The MACD indicator can be presented in a histogram, with each bar representing the distance between the MACD line and the signal line. The bigger the bars, the stronger the trend. When the MACD line is above the signal line, green bars are formed, and red bars are formed when it is below the signal line.

2. Volume indicators

Traders use volume indicators to detect the strength of a market trend. To look at a crypto asset volume, you can use the following indicators:

On balance volume (OBV)

When the price makes higher highs, and the OBV does the same, traders can say that the uptrend is strong and likely to continue. If the price and the OBV continue to make lower lows, the downtrend is expected to continue.

In a range-bound market, if the OBV rises, it can be a sign of accumulation, and there is a likelihood of a bullish breakout. On the other hand, if the OBV falls in a volatile market, a bearish breakout can occur.

If the price continues to move higher, but the OBV does not make higher highs, this may be a sign that volume is easing, and the uptrend may begin to reverse. On the other hand, if the price is making lower lows and the OBV is not, it could be that the price is about to reverse as the volume lowers.

Volume

The volume chart is usually displayed at the bottom of the chart as a histogram. Each histogram bar shows the total volume traded over a given period. Using the daily time frame as an example, each bar of the histogram indicates the total volume traded in a day.

Investors calculate the average trading volume over a given period of time. Comparing the current price volume with the average price over a specific time allows you to determine the validity of a move. Moves that have higher than average trading volume are usually considered more valid than moves that have lower than average trading volume.

3. Volatility indicator

Crypto traders use volatility indicators to spot trading opportunities presented by the frequent price change of crypto assets. The following are indicators you can use to check for crypto market volatility:

Bollinger Bands

The Bollinger Bands indicator consists of three bands: the upper, middle and lower bands. The middle band is a 20-day moving average, while the upper and lower bands of the middle band are separated by two standard deviations each. When the bands expand, that is, move away from the middle band, this indicates high market volatility; however, when they contract and move closer to the middle band, it indicates low price volatility. Keltner channel

Like Bollinger bands, the Keltner channel contains three bands: the upper, middle and lower. The upper and lower bands are set to two ATRs (average true range) from the middle band. The middle band is a 20-day exponential moving average. If the upper and lower bands expand from the middle band, it means that the market has high volatility. In contrast, their contraction indicates low market volatility.

4. Momentum Indicators

Momentum indicators are used to determine the strength of a trend and whether the price trend will continue or reverse. Some indicators used to find out the market’s momentum include the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD) and Average Directional Index (ADI).

Relative Strength Index (RSI)

RSIs are typically used by traders to measure crypto price change and momentum. The indicator measures price change over a default period of 14 days, which can be adjusted according to your strategy. The RSI reads from 0-100, with a reading above 70 considered an overbought market position and below 30 an oversold position. When a trend is overbought or oversold, it is likely to reverse, or at least have a minor correction.

Stochastic oscillator

The stochastic indicator is used to identify overbought and oversold points in the market. It also reads from 0 to 100, with a reading of 80 and above considered overbought and 20 and below considered oversold. Overbought and oversold levels show that the price is likely to reverse.

Paper trade or backtest your strategy

Some indicators may fit into more than one category because you can use them for multiple functions. You need to understand any indicator you want to use and how it fits into your strategy. Paper trading or backtesting an indicator for a while is always a good idea.