7 Crypto Trading Indicators You Need To Know
Knowing exactly when to buy and sell in crypto can be tricky for traders, even for those with experience. While no “holy grail” indicator can guarantee profitability in the crypto markets, there are crypto trading indicators that can help you make more informed decisions when trading cryptocurrencies.
Learn more about the 7 most commonly used crypto trading indicators in this article.
Bollinger Band
A Bollinger Band is a trading indicator that crypto traders can use to identify when the price of a cryptocurrency is oversold or overbought. Developed by John Bollinger in the early 1980s, it consists of three lines on a price chart: a middle band (simple moving average) and two outer bands that are standard deviations away from the middle band.
The middle band is typically a 20-day moving average but the period can be changed on trading platforms based on your preference. It represents the average price over the specified number of periods and is the centreline of the Bollinger Bands.
When prices reach the upper Bollinger Band, this can indicate that the price of the crypto is overbought and that a downside reversal is likely. When prices reach the lower Bollinger Band, this can indicate that the price of the crypto is oversold and an upside reversal in prices can be expected.
The upper and lower bands are set 2 standard deviations above and below the simple moving average respectively, similar to the 95% confidence in a normal distribution, this suggests that 95% of all price volatility will take place within the bands. As prices reach the boundaries of the bands, there is a higher probability that prices will remain within the bands rather than move outside of them.
Crypto Fear And Greed Index
The crypto fear and greed index was developed by Alternative.me to measure two emotions in the crypto markets: greed and fear. Greed and fear are measured as they are the dominant emotions that drive prices in the crypto markets. Calculated based on several indicators, the crypto fear and greed index measures the prevailing sentiment in the crypto markets on a scale from 0 to 100.
A low score indicates that the overall crypto market is in a state of fear while a high score indicates bullish sentiments where crypto traders and investors are greedily buying and driving prices higher.
The calculation of how the crypto fear and greed index is broken down in the following:
- Volatility (25%) – past 30 and 90 days
- Market momentum/volume (25%)
- Social media (15%) – mentions on Twitter and Reddit
- Surveys (10%) – from crypto community members
- Dominance (10%) – Bitcoin market cap dominance
- Trends (10%) – from Google trends data
In addition to measuring the prevailing sentiments in the crypto markets, the crypto fear and greed index can also be used as a contrarian indicator where excessive fear can indicate a temporary bottom and a potential buying opportunity while excessive greed can indicate a temporary top and a potential selling opportunity.
Fibonacci Retracement Levels
Fibonacci retracement levels, which stem from the Fibonacci numbers, highlight the different potential levels of support and resistance. Fibonacci numbers are found throughout nature and these numbers, in percentage terms, are 23.6%, 38.2%, 61.8%, and 78.6%.
Many traders believe that these numbers are not just prevalent throughout nature but also in the financial markets.
To use the Fibonacci retracement levels, a trader has to select two points. Once the two points have been selected, the respective Fibonacci retracement levels are drawn at percentages of that move.
In crypto trading, the Fibonacci retracement levels provide traders with potential levels of support and/or resistance that crypto prices might encounter.
Moving Average Convergence Divergence (MACD)
The Moving Average Convergence/Divergence, also known as MACD, is a trading indicator that shows the relationship between two exponential moving averages (EMAs) of the price of the crypto. There are two EMAs in the MACD trading indicator namely the MACD line and the signal line.
The MACD line is calculated by subtracting the 26-day EMA from the 12-day EMA. The signal line is calculated based on the 9-day EMA of the MACD line. While there are different ways that the MACD trading indicator is interpreted and used, the MACD crossover is the most commonly used by traders.
When the MACD line crosses above the signal line, many traders view it as a potential buy signal. When the MACD line crosses below the signal line instead, many traders view it as a potential sell signal.
Moving Average (MA)
The moving average (MA) is a trading indicator commonly used by crypto traders to analyze the price trend of the crypto. The moving average calculates the average price of the asset over a specific period. For example, a 20-day MA takes the average price of the asset over the previous 20 days. The moving average helps smooth out price fluctuations by providing traders with a constantly updated average price.
Note that as moving averages are derived from past prices, they are lagging indicators. And the longer the period of the moving average, the greater the lag. For example, the 200-day moving average will have more lag than the 50-day moving average.
There are two types of moving averages that traders typically use in the crypto markets: the simple moving average and the exponential moving average. The calculation of the simple moving average takes the arithmetic mean of the closing prices over a specific period while the exponential moving average is a weighted average that gives greater importance to recent prices.
Crypto traders use moving averages to help determine the trend of the crypto. When prices of the crypto are trading above the moving average and the moving average is sloping upwards, this indicates an uptrend. On the other hand, if crypto prices are trading below the moving average and the moving average is sloping down, this indicates a downtrend.
Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum oscillator used by crypto traders to assess the strength and speed of price movements of a crypto. It was developed by J. Welles Wilder and is used to identify overbought and oversold conditions.
The RSI typically ranges between 0 and 100 and it is displayed as a line on a chart.
When the RSI rises above 70, it suggests that the asset may be overbought and that a potential pullback or decline may be imminent. When the RSI drops below 30, it suggests that the asset may be oversold and that a potential rebound or rally might be on the horizon.
Stochastic Oscillator
The Stochastic Oscillator is a momentum indicator used by crypto traders to identify potential reversals. It was developed by George C. Lane in the 1950s and is useful for determining the strength or weakness of a crypto price movement.
The Stochastic Oscillator ranges between 0 and 100.
When the Stochastic Oscillator rises above 80, it suggests that the asset may be overbought and a potential reversal or correction may be imminent. In contrast, when the stochastic oscillator falls below 20, it indicates that the price has dropped significantly, and a potential rebound or rally might be on the horizon.
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Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service.
Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.