Best Indicators for Crypto Trading

Due to the deep liquidity and high price volatility, cryptocurrencies are among the most lucrative markets. However, this also makes crypto trading a sophisticated, challenging, and competitive field that many traders struggle to succeed in. To maximize their efficiency and make the most out of the market opportunities, one should constantly look for advanced technical analysis indicators to enhance their trading strategy, while using the best cryptocurrency apps for beginners. This guide will go through the crypto indicators considered to work best for forecasting an asset’s price movement and generating trend reversal signals.

What is Technical Analysis and What is Its Application in Crypto Trading?

Technical analysis is one of the two ways to forecast market behavior and price movements, alongside fundamental analysis.

The technical analysis methodology examines statistical trends and historical trading price data gathered from past market activity. Some of the central analysis points are price movement, momentum, volume, and more. Technical traders apply indicators on a price chart to identify patterns that can help forecast the trend direction.

Traders often combine fundamental and technical analysis building a holistic trading strategy. However, the truth is that the latter is the dominating methodology when it comes to cryptocurrency markets. Unlike stocks, digital assets don’t have balance sheets to feed into your asset price forecasting. So the only element of fundamental analysis relevant here is news (and its effect shouldn’t be underestimated).

Similar to a stock’s price analysis, the best application of fundamentals when trading the crypto market is by keeping an eye on the news and plotting technical indicators on a trading chart to predict where the digital asset’s price is headed next. In that sense, the next question that most likely interests you is:

Which Are the Best Technical Indicators?

The high numbers of different technical indicators explain why many traders experience FOMO, often wondering whether there is some indicator that can predict the market’s behavior better than what they have in their arsenal. While plenty of niche indicators may lure your interest, the truth is that the most popular and commonly-spread tools are where the magic happens. Bear in mind that indicators that have been battle-tested for decades and have proven to work throughout various market cycles and across different volatility and liquidity environments have the best chance to enhance your strategy.

If you are familiar with the best indicators for day trading, you will recognize that many of the leading indicators work for multiple assets, including day trading cryptocurrency, swing trading crypto but also with other assets and strategies. The reason is that crypto trading often shares very similar characteristics to day- or swing trading. So in that sense, whatever works when day trading stocks or futures also works very well in the world of digital assets.

Moving Averages

Moving averages are trend-following indicators (also known as “lagging indicators”). Alternatively, they take into account past closing prices to give you delayed feedback about the trend. The Moving Average (MA) is probably the most common and widely used technical trading indicator. Furthermore, it is also very easy to use.

The MA shows the average price of a particular cryptocurrency over a specific period. The time frame may be 200 days (200-day MA), 50 days (50-day MA), 20 days (20-day MA) or else.

The rule of thumb is that the shorter the timeframe is (lower number of periods), the more reactive the line gets.

The moving average indicator helps traders spot bullish and bearish trends and identify support and resistance levels. The trend is positive if the different price points are above the MA. If they are below it, the trend is negative.

Paired with other indicators, MAs can help crypto traders sell or buy at the best moment. However, bear in mind that the MAs are very basic by design, and if used as a standalone indicator, they can generate a deceiving buy or sell signal. Therefore, make sure to always use other tools like the RSI indicator, for example, to validate the signals from the MAs.

Exponential Moving Average (EMA)

While there are various types of moving averages, the most popular one among crypto traders is the exponential one. The reason is that it works very well in fast-moving markets.

Unlike the simple moving average, which gives equal weight to all data points, the EMA prioritizes recent price data. Thanks to this, the indicator is more responsive to price changes. That way, the EMA overcomes the redundancy issue often seen with the simple moving average.

The interpretation of EMA is similar to the one of other moving averages. For example, if the long-term line crosses the short one from below, we have a signal for an uptrend. And vice-versa.

Moving Average Convergence Divergence (MACD)

The MACD is another momentum indicator. Think of it as a more advanced version of the exponential moving average. The MACD indicator is calculated by subtracting the longer-term EMA (usually 26-period) from the shorter-term EMA (usually 12-period). There is also a signal line that is usually based on the 9-day EMA and a histogram.

The way the indicator works is very simple – it tracks the convergence and divergence of two moving averages. When the MACD crosses the signal line from below, you have a buy signal. On the other hand, when it crosses the signal line from above, you have an indication to sell. At the crossover point, the histogram is at its midpoint, with a zero value. As the trend gets stronger, the gap between the two lines broadens. On the other hand, as the trend weakens, the gap narrows (this is also reflected in the histogram lines).

Another strategy involving the MACD indicator is to look for crossovers. If it crosses above zero, you have a bullish cross. On the other hand – if it crosses below zero, you have a bearish cross.

As with most other technical trading tools, however, you should avoid using MACD as a sole indicator.

On-Balance-Volume (OBV)

The OBV is probably the most popular volume-based indicator. Personally, I also consider it one of the best indicators on this list.

When analyzing price charts, most traders know that monitoring the price behavior alone reveals only a part of the picture and can often generate false trading signals. Therefore, it is critical always to double-check if the trend’s movement is backed up by the volume as well.

The OBV offers the complete package by monitoring both the price and the volume market data to help you accurately determine the trend. In addition, it measures the trading volume for a particular cryptocurrency to give you a fair representation of the buying and selling pressure.

There are two scenarios for interpreting the OBV’s signals. First, increasing OBV indicates that the buying pressure is piling up. On the other hand, a decreasing OBV means the selling pressure is growing. If an increase in today’s trading volume also supports these signals, then you have a solid indication to make a trade.

The OBV is an indispensable part of most crypto trading strategies. The reason is that the OBV in crypto trading works even better than when trading stocks. In the latter case, a single earnings call can inflate the indicator. With cryptocurrencies, the lack of clear fundamentals means the OBV is more reliable. And considering the recent institutionalization of the crypto niche, the OBV’s role in one’s trading toolbox becomes even greater.

Relative Strength Index (RSI)

The Relative Strength Index is part of the momentum indicators group, a very simple yet highly effective technical trading tool. It signals very clearly when the existing trend for a particular cryptocurrency enters an overbought or oversold market territory.

The RSI is based on the asset’s closing price and has values between 0 and 100. When the indicator’s value is above 70, it signals an overbought market. Alternatively, there is high selling pressure, while the bullish signals are getting weaker. As a result, the price will likely reverse and head down. On the other hand, the market is considered oversold when the indicator’s value is below 30. This means the price will likely go up due to mounting buying pressure.

The RSI is a great indicator to use to get an idea of a particular trend’s strength or weakness. Bear in mind that the indicator can go above or below the 70 and 30 marks, respectively, and stay there for a while. However, if the price reverses and crosses in the neutral territory, you will have a bearish (below 70) and a bullish (above 30) signal.

Bollinger Bands

This is one of the most preferred indicators for tracking market volatility. And as we know, the crypto market has plenty of it!

As its name suggests, the indicator consists of different lines – a middle, an upper, and a lower one. Usually, the indicator oscillates, and the specific price point moves between the lower and upper bands. When the volatility is piling up, the bands widen. And vice-versa – when it is shrinking, the lines get closer to each other.

Bollinger Bands is a great indicator to use to keep track of the market momentum. By monitoring the distance between the upper and lower bands, you can timely spot looming breakouts and identify when the current trend is running out of steam.

However, don’t expect that using Bollinger Bands will tell you the exact direction the trend is heading. Instead, it will tell help you evaluate its strength.

Many traders often use the Bollinger Bands’ indications as buy and sell signals. Traders consider it a buy signal when the price crosses above the middle line (an SMA). In such situations, the upper band is in the role of a resistance level. And vice-versa. However, bear in mind that this strategy has proven most effective when the bands squeeze.

Crypto Trading Indicators and Price Movement Analysis Summary

The trading indicators in this article are just a tiny part of what you can use to profit from the crypto market. The Aaron Indicator, Stochastic Oscillator, Average Directional Index, Fibonacci Retracement, Money Flow Volume (or Money Flow Index) and others can also prove very helpful, depending on your strategy.

No matter which indicator you like most, never forget the rule of thumb – always base your strategy on more than one indicator. No indicator can give you the complete picture and generate 100% accurate signals all the time. That is why it is critical to combine different indicators to minimize the risk of false signals and maximize your chance to timely capture price changes. For example, use an indicator to draw support lines, another to measure how strong the price is rallying and so on.

Do your research and find out the most suitable indicator for your needs. Those mentioned in the article prove to be a great starting point.

About the author: Alexander is the founder of daytradingz.com and has 20 years of experience in the financial markets. He aims to make trading and investing easy to understand for everybody, and has been quoted on Benzinga, Business Insider and GOBankingRates.