Best Indicators For Crypto Trading And What To Avoid
Cryptocurrency markets are notoriously volatile. To become a successful trader, you need to be disciplined, have the right information and know what signs to look out for.
This article focuses on the latter point. Understanding crypto indicators is an important step to becoming a successful trader.
We’ll also explain some of the big mistakes that new or unsuccessful traders make, so you can get off to a great start.
What Are Crypto Trading Indicators?
Successful crypto traders don’t just rely on instinct. They use research and analysis to ensure they make good decisions.
Trading indicators are an important part of this analysis. They represent common trends and patterns in crypto markets that indicate how the price of a currency will change.
Recognizing these patterns, and knowing what they mean and how to act on them, help investors make better, more informed decisions.
Technical indicators can be separated into two groups:
- Leading indicators – Anticipate an asset’s future price movement. They are built on the assumption that price changes are cyclical. They allow you to predict price movements by identifying patterns.
- Lagging indicators – Are used to confirm whether a movement or trend is in progress. These indicators won’t help traders open a position at the beginning of a trend. Instead, it gives them a greater measure of confidence in their trades.
There’s also another side to spotting crypto indicators—traders use a number of different charts, each providing different data.
In the next section, we explain the basics of how to read some of these charts so you can spot trends.
Crypto chart basics
Technical analysis typically involves using mathematical indicators with crypto market charts.
Most crypto charts show the asset’s price change over time. Time is plotted on the X-axis and the price is charted on the Y-axis.
There are a couple of common features that appear in all charts that represent traded assets, whether they’re stocks and shares, or currencies. These are trend lines and candlesticks.
Trend lines are lines that traders draw on cryptocurrency market charts to show the trajectory of its value. They usually form recognizable shapes that indicate how the currency will behave in the near future.
Below is an example from the stock market, showing the U.S. S&P 500 Index between 1950 and 2008. Several trend lines have been drawn onto the graph to help highlight the index’s long-term trajectory.
Traders could use this to predict where the market is going and to decide whether it is in a bull or bear run.
What is a Candlestick Chart?
A candlestick chart shows a cryptocurrency asset’s price movement via a series of “candlesticks” that represents a trading day.
Candlesticks help investors understand market sentiment by showing more information on how the currency performed that day.
There are two types of candles. A black candle (often seen as red) indicates that the day’s closing price was lower than the opening price. Orange candle (often seen as green) means that the trading price closed higher than when it opened.
Each candle consists of two thin sections called wicks and a thick section called the real body.
Each section can be a different size and gives us the following information:
- The top wick: Represents the highest price that the currency sold for that day.
- Top of the real body: The price it opened at on that day.
- Bottom of the real body: That day’s closing price.
- The lower wick: The lowest price it sold for on that day
Indicators in crypto trading
As already mentioned, indicators are common patterns that allow traders to identify or predict trends.
There are two ways to visualize indicators:
- As trend lines on the price chart
- By viewing other data alongside the price chart (usually underneath)
Let’s have a look at some common indicators:
Support and resistance
The chart below is a good example of trend lines. Support and resistance are price levels that a cryptocurrency finds difficult to break through
- Support: The level at which a currency’s price struggles to go beneath.
- Resistance: The level at which a currency’s price struggles to go above.
Support and resistance often feel like barriers, and the price will usually appear to bounce back up or down after hitting one of them.
They are useful indicators for traders because if a price is at or near one of these lines, then it is likely to change in the near future.
Sometimes these changes are referred to a trend reversal. A trend reversal is when a trend starts to lose momentum and starts to change directions.
Seasoned traders can usually clearly identity the patterns that confirm when a trend is changing.
The trading chart below shows an example of resistance and support lines.
On-balance volume indicator (OBV)
The total amount of a currency sold on any given day is known as its “volume”. The OBV indicator is a cumulative figure that adds or subtracts each day’s volume.
The OBV is useful because it helps you determine whether price changes match market demand.
For example, you would expect a significant price increase to be followed by an increase in volume. If this doesn’t happen, then it suggests that the higher price is being supported by fewer buyers and the lack of demand could cause it to fall in the near future.
The image below shows the opposite. As the price for this asset decreases, traders continue purchasing more, leading to a sudden spike in value.
Moving Averages (MA)
They help predict future trends in the market. Moving averages are used to confirm existing trends.
So if the moving average is increasing, then the price is likely to increase too. However, if it is slowing or decreasing, then the price is likely to decrease as well.
Many crypto traders will use a moving average indicator as a first step in deciding whether to make a bullish or bearish move.
Which moving average period you use depends on your trading strategy.
A long-term investor who intends to hold a currency for at least 12 months might look at the 200-day moving average. A day trader, on the other hand, might focus on the 20-day moving average.
There are several types of moving averages, but the most common ones are:
- Simple moving average (SMA): This is all the closing prices in a given period added up, and then divided by how many there are. Prices beyond this period are disregarded.
- Exponential moving average (EMA): The exponential moving average indicator takes into account all previous prices to date. It still represents a moving period and gives greater weight to prices within this period.
There are also several different types of moving average charts. Two well-known ones are the Moving Average Convergence Divergence (MACD) and the Ichimoku Cloud.
This is a complicated momentum indicator with three different components. They are:
- MACD line: represents a longer-term moving average calculation
- Signal line: represents a shorter-term moving average calculation
- Histogram: charts the difference between the two lines
The complexity and amount of information that MACD charts offer means that there are many ways to use them. Two common approaches are:
- When the MACD line and signal line cross over, it indicates a change in the market and can be a signal to buy or short a currency. This is a lagging indicator.
- Divergence of the asset price from the histogram indicates an approaching trend change. This is a leading indicator.
These are just two ways to use a MACD indicator.
This chart also provides a lot of detailed information. It is useful because it shows projections of support and resistance levels, not just the current ones.
It shows a candlestick chart with five plot lines:
- Conversion line: This is a 9-day moving average.
- Baseline: This is a 26-day moving average. If the price is above the cloud (see below), then the conversion line crossing above the baseline is usually considered a signal to buy. If the price is below the cloud and the baseline crosses over the conversion line, it is considered a signal to sell.
- Span A: The conversion line plus the baseline, divided by two. This represents potential future resistance levels.
- Span B: This is the 52-period high plus the 52-period low, divided by two. This represents potential future support levels.
- The cloud: The shaded area between spans A and B. If the currency price is above the cloud, then it is usually considered a signal to buy, while going below the line is often a signal to sell.
- Lagging span: Shows the closing levels plotted 26 days in the past. If this line follows the current price, then the currency is in a strong trend. If it doesn’t, then it is in a weak trend.
Relative Strength Index (RSI)
This is a momentum indicator that measures the speed and magnitude of a price change by evaluating how over or undersold it is. It is calculated using a complex formula.
The RSI indicator is measured in a range of 0–100. Anything below 30 is considered oversold and anything above 70 is overbought.
It can be used in combination with other technical indicators to identify entry and exit trading signals during trading.
The image below shows the price of Bitcoin (top) and its RSI indicator (bottom). The divergence between the two suggests that the momentum behind the market is slowing and the price may be approaching a turning point.
Bollinger Bands (BB)
This is an average price momentum indicator calculated by adding or subtracting a standard deviation from the moving average.
If the market price is above the Bollinger Band, then it suggests that it has been overbought and if it is below, then it indicates that it has been oversold.
Bollinger Bands consist of three lines:
- Positive standard deviation line
- Negative standard deviation line
- Simple moving average line
If the lines are far apart, it indicates that the market is volatile. But if they get squeezed together, it indicates low market volatility and a potential breakout.
If the gaps between the lines start to increase again, it indicates that the trend may be losing momentum.
The image below shows Bollinger Bands plotted on a candlestick chart, with the RSI shown below.
Crucially, it highlights a point where the market price exceeds the top standard deviation line, suggesting that the price could begin to encounter resistance and this may be a good signal to sell.
What to Avoid When Trading Crypto
If you want to be a successful crypto trader, then learning to perform technical analysis by reading charts is vital.
But the other side of being a good trader is discipline. You need to take the right approach to trading or you could risk losing a lot of money.
Here are some simple rules to ensure you make safe, logical decisions.
Buying high, selling low
This covers two major traps for rookie crypto traders: hype and volatility.
- Hype: Some cryptocurrencies get hyped on social media, leading to their prices skyrocketing. Afraid of missing out, rookie traders then buy crypto upon it going viral, but already being near its peak, its value falls again a short time later.
- Volatility: Cryptocurrencies are notoriously volatile and prices can rise and fall significantly in a single day. This can make new traders panic and sell when the price is low.
These two factors together can quickly leave you out-of-pocket.
Not knowing how to research the crypto market and perform analysis
Buying crypto simply on a forum tip, or because everybody else is, could easily lead to losses.
In such cases, some tipsters may only want to boost the price of their own assets before they dump them.
The only way you can be sure of a currency’s true potential is to learn how to research and analyze it thoroughly yourself.
If you are part of a forum or group, make sure it is trustworthy and considers a range of different trading techniques and points of view.
Support from a community is great, but ultimately you need to make responsible decisions based on a number of factors—including your unique financial situation.
Trading without a thought-out strategy
It’s important to set yourself clear rules to guide your trading behavior. This stops you from getting too greedy or failing to sell before you experience significant losses.
Some things to consider in your trading strategy are:
- How much money can you afford to lose?
- How much money do you want to make?
- What is the biggest/smallest position you will open?
- What is your risk tolerance?
- When will you sell to avoid further losses?
- When will you sell to take gains?
- When will you hold and how much?
- How often will you trade?
Investing money you can’t afford to lose
Cryptocurrencies are volatile and no one can fully predict whether a coin will increase or decrease in value.
You could easily end up losing significant amounts of money—even if you know what you are doing.
It’s extremely risky to trade with the money that you need to pay bills or put food on the table. You could end up getting yourself into serious financial trouble, not to mention causing damage to your relationships with family members.
It is important to trade responsibly and realize that crypto trading is not a get-rich-quick scheme.
Not having a diversified portfolio
Just investing in one or two cryptocurrencies is risky. If one crashes, then you’ll lose a big chunk of your investment.
By spreading your investment across different coins and assets classes, you reduce the risk to your overall portfolio.
It’s a good idea to plan your portfolio and ensure you have a good balance stock, forex and have some larger more stable currencies like Bitcoin and smaller, more volatile coins that have high growth potential like TVK.
A key to a successful portfolio is diversification not just between high risk and lower risk coins but asset types too.
Every time you place a trade you have to pay several fees. You also need to hold on to assets for a decent amount of time to make a worthwhile profit.
These two factors combined mean that opening and closing positions too often will actually make your trading less profitable.
To avoid this, you need to do your research and analysis, and ensure that the currencies you buy are likely to increase in value for a decent period of time.
Discipline is vital in crypto trading. Fear and greed can lead to terrible decisions being made that ultimately result in you losing lots of money.
If you’ve got a strategy then stick to it. Avoid:
- Selling too quickly when a coin’s value drops.
- Holding on to currencies that are running out of steam because you’re waiting for the peak.
- Holding a currency that is tanking because you “like it” or hope that it will return to profitability.
Lack of security
As with all financial products, there is a security risk around using trading platforms.
A good platform will offer several security features to keep your assets safe, including:
- Two-factor verification: This will help avoid your account being hacked.
- Cold storage: This allows you to store your cryptocurrency assets offline so that hackers can’t steal them.
- Updated multi-layered security: Your platform should get regular security updates and be able to deal with the latest threats.
- Full transparency: You should always know where the platform is run from, where your assets are stored, and who runs the company.
Other tips to stop hackers from breaking into your crypto account include:
- Avoid using public Wi-Fi
- Don’t use unsecured software and extensions
- Use strong passwords
- Crypto technical analysis indicators help traders make good buying and selling decisions.
- There are two types of analysis for traders: fundamental analysis and technical analysis. Technical analysis is more relevant to crypto.
- To get a basic knowledge of indicator charts you need to understand trend lines, candlesticks, and support and resistance levels.
- On-balance volume indicators, moving averages, MYC, relative strength index, MACD, and Bollinger Bands are all useful crypto trading indicators.
- There are many common mistakes made by crypto traders. The best way to avoid making them is to learn how to research and analyze cryptocurrencies so that you make better decisions.
- When a cryptocurrency is overbought, it means that its popularity has pushed the value above the level that traders are willing to pay for it. It usually means that fewer people will buy it and it is often accompanied by a drop in value.
- When a crypto asset is undersold, it means that its lack of popularity has pushed its price down to the point where it is undervalued. It can be considered a signal to buy and is sometimes followed by an increase in buyers, which may cause the price to go up.
Understand Crypto Trading Indicators With The Birb Nest
Understanding indicators is a cornerstone of successful crypto trading.
But it’s not the only factor and to be successful you need to educate yourself on how to trade crypto. If you don’t, you could fall foul to some of the pitfalls listed in this article.
If you want to learn more about how to make money trading crypto and forex, then sign up to The Birb Nest. We provide professional mentoring and education to budding traders.