5 most used indicators for trading cryptocurrencies
5 most used indicators for trading cryptocurrencies

5 most used indicators for trading cryptocurrencies

Technical indicators help to understand the best points of buy and sell, bringing peace of mind to trading

Technical indicators are one of the most used resources in the interpretation of a given market. They are useful for the trader in many assets: They are traditionally used for the stock market, futures, Forex etc. and also for the cryptocurrency market.

The reason is simple: Technical indicators help to understand the best points of purchase and sale, bringing peace of mind to trading. But know that there are indicators preferred by professional traders! In this article, we bring you the 5 most used indicators for trading cryptocurrencies! Keep reading below.

Technical indicators: Understanding the basics

Technical indicators are basically mathematical formulas created by traders that are benchmarks in a market. And why are they a benchmark? Because they helped, at some point, to understand the whys of the market: Reasons for ups, downs and consolidation. 

There are several types of indicators: Oscillators, trackers, volume, among others. Understanding what each indicator shows is an excellent way to understand trading. Keep reading to find out more about the main indicators for cryptocurrency trading.

Moving average

Moving average is certainly the most classic indicator on the market. It’s easy to use and interpret, reason why it remained over time one of the traders’ favorite indicator.

The moving average, in short, calculates an average price of an asset based on its previous periods. Example:  A moving average of 21 periods, calculates the average price of those 21 periods. If the period is 21 days, it calculates the average price for those 21 days. If it is a 5-minute chart, it takes 21 5-minute candles as a basis to form the average price.

And why is the moving average so useful for the market? If we know the average price of an asset, we can analyze, through the slope of the curve, the best sale and purchase prices after identifying the market trend.

We know that a particular cryptocurrency, however good and innovative its project is, will never go up indefinitely. It will go up with corrections (returns to a point below) and then it will keep going up. It happens to any asset. So, the moving average makes it easier to understand that the best purchase prices in a correction have an upward trend.

How to use averages?

If a cryptocurrency is trending (tops and bottom upward trend), by using an average price, it is possible to buy at a low price and sell at a high price.

One of the biggest mistakes traders make in the cryptocurrency market is buying tops and selling bottoms. This is a crucial mistake in the long run. It is important to reinforce: In trading, knowing when to buy and sell is critical. As good as the cryptocurrency is in terms of fundamentals or better as its project is, in trading identifying the best prices at the time of the transaction is the key point.

That way, if the market is up, you will find that averages tend to tilt upwards. And in returns to averages (a classic strategy), there is an opportunity to trade in favor of the trend.

A question may arise: “What is the best period on the average?.” The answer is in the topic below.

Using long or short averages?

One of the big questions for traders is which average to use. The answer is simple: It depends. It depends on the graphic you are tracking (timeframes), the cryptoasset analyzed, search for bigger or smaller targets, among other factors.

Evaluate the following points:

  • Join the chart you are tracking with your profit and loss goals: If you are looking for longer operations within the day, it is interesting to use a smaller timeframe chart and a bigger average.
  • Using slow moving averages makes it easier for longer operations, with greater gain and loss. Using shorter averages tends to shorten your gains and consequently your possible losses.
  • Test in practice: The best practice is testing. Understand in practice how the averages behave in the cryptoasset you want to track.

Here are some classic frequencies you can use: 

  • Fast moving averages: 7, 9 and 21 and 34 periods.
  • Slow moving averages: 72, 100, 200 periods.

And how about when is the market consolidated?

The traditional use of moving averages, when it comes to taking advantage of operations, is made through upward or downward trends.

In consolidations, you can take advantage of the market, but try to look for other operational means.

In the case of the average, you will notice that when the price of a particular cryptocurrency remains within a range (without exceeding that range neither up nor down) the price tends to pass (cross) the average several times. When this occurs, without breaking tops and bottoms, be careful when using the average as a reference for buying or selling.

Another indicator helps to understand trading in consolidations: Bollinger Bands

Bollinger Bands

The Bollinger Bands are an indicator of the categories of oscillators. It is a volatility indicator: Through the Bollinger Bands, we identify the average market volatility. In a cryptocurrency market, there’s plenty volatility. But more than that, the Bollinger Bands help to understand how to act in the consolidation.

As you saw in the previous topic, consolidation is when the price of an asset is within a range. Thus, there are no upward or downward breaks. But how do Bollinger Bands help in this context?

Even in a consolidation, the maximum and minimum prices of an asset are irregular. So, one thing is certain: It does not make sense to buy tops and sell bottoms; if you want to trade, you should buy at the bottom of the consolidation and sell at the top of the consolidation.

But what is the entry point? Bollinger Bands help to understand. When the market overcomes a consolidation and the movement does not continue, it tends to reverse. When these “false breaks” occur, there is usually an overcoming of the band. In practice, the sum between the consolidated market and Bollinger Bands shows that the market is more likely to reverse and that the extreme points are good for buying and selling.

Thus, it is possible to identify tops of the graph when the upper band has been broken, and when you notice that the movement has lost strength, it is time to trade against it.

RSI

RSI is another technical indicator widely used by traders. Since it’s ease to interpret, it is possible to make a quick analysis of the market context. Similar to the Bollinger Bands, RSI is also an oscillator. This means that it is used to identify market volatility.

However, there is a particularity in relation to RSI. In moments of upward or downward trend, it presents great opportunities for the trader.

When a cryptocurrency is trending up, the prices tend to go up, with tops and bottom in an upward trend. It was said that the trader should avoid trading by buying tops and selling bottoms. But the RSI further confirms this statement: It shows when the movement is stretched, even when trending.

It is understood that if the RSI is below 30, the market is overbought. If it’s are over 70, the market is oversold. So, if there is an upward trend and you don’t know whether it is time to buy or not, follow the RSI! It shows if the movement, at that specific moment, is in exhaustion.

Thus, if there is exhaustion, the right thing is to wait for the RSI to identify a price return to levels below 70 in an upward trend to make the purchase.

The indicators make you understand the market context. Another highly relevant indicator is volume.

Volume

The volume is a fundamental indicator for the analysis of any market. This indicator shows the interest on the part of the market participants. If there is interest, there is negotiation and there is certainly the possibility of strong movements in a particular cryptocurrency. With low volume, it is difficult to interpret the movement of a certain cryptocurrency, as it is liquidity that brings safety to trading.

In the case of volume, there are some ways to use it. It is always important to interpret the context of the market to trade, and when the market is in consolidation regions, coming out from a consolidation usually comes with a strong volume movement.

Understanding the influence of volume

Why does that occur? Let’s take an example with an upward trend. When coming out from a consolidation to start an upward trend, the players behave as follows: Whoever wants to buy, believes that moment is important, it is the starting point of the trend. On the other hand, whoever wants to sell, must keep this “impulse” from buyers.

It’s the bull vs bear fight in the market. If in this case the “bulls” win and the market goes up, the “bears” tend to stop. In this case, the volume increases. It is at this point that you must understand the dynamics of the market.

While buyers want to continue buying, because they understand that there is an uptrend opportunity, sellers need to move out of their positions. That is, sellers need to buy. This “pushes” the price of a cryptocurrency up.

So, always analyze the volume in transactions! When you notice the beginning of a movement, the volume confirms that there are actually participants interested in buying or selling at that price. If there is no volume, the movement tends to be weaker.

Cumulative Orders

One of the great advantages of professional platforms for cryptocurrency trading are indicators that are not normally found in these markets.

One of these indicators is the cumulative orders. The cumulative orders allow monitoring the balance of orders between buyers and sellers. If the balance is positive, it means that buyers are winning the fight against sellers. If the balance is negative, the sellers are winning the fight.

The major point of the cumulative orders is to understand that it is in fact the orders that move the market: Purchases at ever higher prices push a cryptocurrency upwards. Sales at increasingly lower prices, push a cryptocurrency down.

Thus, if the cumulative balance is increasing, it means that, comparing the two orders, the trend is for the market to go up. In other words: buy orders are greater than sell orders. 

These indicators are an excellent validator of trends: Follow them and see if the orders are following the price movement. This way, you can seek longer targets in trading.

But remember that no indicator gets it right every time. The indicators are there to interpret and assist the trader in their market decisions. Study them and find out which of these indicators make the most sense to be in your operational framework.

Keep following the blog and read more about the main charts used by cryptocurrency traders!

Especialista em trading e produtor de conteúdo para mercado financeiro e traders de diversos perfis. É formado em Administração de Empresas (UFRGS) e pós-graduando em MBA Broker Global (IBMEC). Há mais de 4 anos, trabalha auxiliando traders e investidores a chegarem aos seus objetivos financeiros.

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