Best indicators for crypto trading

Technical analysis and trading strategies are not only limited to stocks, they can also be applied to cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH).

The trading indicators are similar, but there are certain nuances that separate crypto trading from stock trading. For example, crypto traders have to withstand greater volatility and have a shorter history to work with, so some indicators work better for crypto trading than others.

In this article, we will discuss the best technical indicators for crypto trading, and the best part is that they are all available for free.

I hope these pointers can help you make better investment decisions, decide when it’s a good time to enter, and increase your chances of success in the cryptocurrency market.

What are the best indicators for crypto trading?

1. Simple Moving Averages (MA)

Simple moving averages calculate the average of price movements in a given time period. It is an easily accessible indicator that gives traders an idea of ​​the price trend, based on historical price movements.

You can adjust the period of your moving average based on your trading time frame. Usually, a 20-day moving average is used for short-term investments, while a 50- or 100-day moving average is used for longer-term trades.

In general:

Buy signal: when the price goes above the simple moving average Sell signal: when the price falls below the simple moving average

Where to get the moving average indicator for crypto trading?

You can get moving averages on TradingView, here is an example using a Bitcoin daily chart:

Word of caution, if you use a moving average with a shorter time frame, be aware of ‘sweep saws’ where price drops below the moving average and quickly bounces back.

This can be smoothed out by using a moving average of a longer time frame instead. Or…

Use two MAs for more confidence

Another common practice used by crypto traders is to rely on two MAs instead of just one.

For example, the pairing of 20 day MA and 50 day MA on a daily chart can help a trader identify entry and exit points with more confidence. Here the signals are slightly different:

Buy signal: when the shorter MA goes above the longer MA Sell signal: when the shorter MA goes below the longer MA

Here is an example:

If you want an indicator that will tell you even more, let’s move on to:

2. Moving Average Convergence/Divergence (MACD)

The MACD is one of the most popular and common indicators in technical analysis. And is commonly used by trend following momentum traders to identify indications of market trends.

It works by tracking the relationship between a shorter and a longer exponential moving average (EMA). Unlike simple moving averages, the calculation for exponential moving averages gives more weight to the latest data and is said to be more sensitive to price movements.

There are three parts to the MACD indicator:

MACD line: plotted using 26 period EMA – 12 period EMA. Signal line: plotted using the 9-day EMA. It is used to spot trend reversals and price swings and as the name suggests, it acts as a buy/sell signal. Histogram: plotted by taking MACD – Signal, it summarizes the relationship of MACD and signal.

In general:

BUY signal = when MACD line crosses Signal line from below SELL signal = when MACD line falls below Signal line from above Uptrend = when both MACD and Signal lines move upwards and Histogram is above zero. Downtrend = when both MACD and signal lines are moving down and Histogram is below zero.

You will see that the movement of the histogram is in line with the buy and sell signals.

Where to get MACD indicator for crypto trading?

I know, the above is too complicated to calculate by hand. Good news, the MACD is so popular that most trading platforms offer it as a standard indicator.

Here is an example from TradingView, using a Bitcoin weekly chart:

The MACD relies on moving averages calculated using historical data. This means that the indicator can lag and you won’t be able to catch the extreme tops and bottoms.

However, it has been proven to be reliable and has remained a popular indicator for decades.

Moving averages give you an idea of ​​when to buy and sell based on past prices. If you feel that price alone is not sufficient, you may consider using the following indicator alongside moving averages:

3. On-Balance Volume (OBV)

On-Balance Volume (OBV) is a cumulative indicator that uses volume flow and closing prices to predict future price movements.

If price closes higher than yesterday, volume for today is added to the total OBV and OBV rises. If price closes lower than yesterday, volume for today is subtracted from total OBV and OBV falls. If price closes at the same rate, OBV is unchanged.

So what does OBV tell you?

It is quite simple.

When OBV increases, it means that buying pressure is high and investors are willing to pay a higher price for the cryptocurrency. In such cases, if the crypto price also makes higher highs, the uptrend is likely to continue.

When OBV is decreasing, it means that selling pressure is higher and indicates a bullish trend. If the crypto price makes lower lows alongside the falling OBV, the downward momentum is likely to continue as well.

When OBV and price disagree, it indicates that the momentum is likely to slow or stop.

Sounds pretty obvious right?

OBV shines when price trades sideways, as it may suggest that a breakout may occur soon. When OBV increases during a sideways market, an upside breakout may be on the way. The opposite is also true.

The downside to relying on volume is that a sudden increase in volume can make the OBV indicator inaccurate for a while. Therefore, OBV is rarely used alone, but it is usually paired with MACD or RSI (which we will learn next).

Where to get the OBV indicator for crypto trading?

You can also get the OBV indicator via TradingView, here is an example using a daily chart on Bitcoin:

So far we have learned three crypto trading indicators that help us better identify when to buy and sell.

Next, we’ll examine indicators that tell us whether a cryptocurrency is undervalued or overpriced.

4. Relative Strength Index (RSI)

The Relative Strength Index was developed by Welles Wilder, a mechanical engineer, real estate developer and technical trader in 1978. It was used by crypto traders to understand the market sentiments and to identify whether a cryptocurrency is overvalued or undervalued. is.

The RSI is an oscillating indicator with values ​​in the range of 0 to 100, where closer to 0, an asset is oversold or undervalued and vice versa. In crypto trading, commonly used levels are:

When RSI is above 70, the crypto is overpriced When RSI is below 30, the crypto is underpriced

RSI is calculated using the following equation:

RSI = 100 – (100/(1-RS)), where RS = Average Profit / Average Loss

Most formulas use a 14-day period to calculate the average profit and loss, but you can adjust the time frame based on your trading strategy.

Where to get RSI indicator for crypto trading?

You can also find an RSI indicator within TradingView, out of the box, it uses a 14 day time period which you can change via the settings.

Again, here’s an example using a weekly Bitcoin chart:

As you can see, Bitcoin prices were overbought in the 2021 bull run as they hit new highs. But fast forward today it looks like prices are oversold as the market has cooled since the start of the year.

5. Bollinger Bands

Developed by John Bollinger in the 1980s, the Bollinger Bands give crypto traders an idea of ​​whether an asset is overbought (aka overpriced) or oversold (aka undervalued) by incorporating price movements with volatility into its calculations.

The Bollinger Bands consist of three lines:

Centerline: A simple moving average Upper Band: 2 standard deviations above the MA Lower Band: 2 standard deviations below the MA

The range between upper and lower band will tighten and widen depending on the volatility of the asset – when volatility is higher, they will widen and when volatility is lower, they will tighten.

A common time frame for the Bollinger Bands midline is a 20 day MA with the upper and lower band separated by 2 standard deviations. For a longer period, you can consider using a 50 day MA.

Advanced traders can also adjust the standard deviation to cater for specific cryptocurrencies.

How to use Bollinger Bands?

In general, the closer the price is to the upper band, the more overbought the cryptocurrency is. And the opposite is considered true – the closer the price is to the lower band, the more oversold the asset is.

Also, with Bollinger Bands, price tends to move towards the center line. So, another way to use this indicator is to look out for Bollinger Bounces where when the price moves above the upper or below the lower band, there is a high chance that the price will reverse soon.

Where to get Bollinger Bands indicator for crypto trading?

Similarly, you can access Bollinger Bands via TradingView. Here is an example of the Bollinger bounce in action:

Note that this can be quite subjective and there are cases where prices may run along the upper or lower bands for a while before returning to the midline. You may find it useful to combine both Bollinger bands with the moving average before deciding whether to make your next move.

Summary

I have covered 5 best indicators for crypto trading above. Ideally, you should use multiple indicators to get a better idea of ​​the current market sentiment and to make better trading decisions.

For example, Alvin uses an indicator similar to the MACD with exponential regression and a quality filter to generate a list of cryptocurrencies with high momentum previously, you can read about his momentum trading process here.

If you want to use indicators that are more specific to trade Bitcoin more efficiently, I previously shared two on-chain metrics for Bitcoin.

I hope this article was a useful introduction for you, good luck out there!

PS if you want to invest in crypto but don’t know where to start, let AK give you the basics at this free crypto masterclass.