Looking to move into Bitcoin? Here are the top five indicators to look out for when trading crypto.
Cryptocurrency is notoriously volatile. While the rapid swings in price can turn some investors away, they provide a wealth of opportunities to capture lucrative profits for other savvy traders.
To maximize the number of winning trades, crypto traders usually have several tools to give them a clearer idea of price direction.
The Relative Strength Index (RSI) is most crypto traders' go-to indicator to get a feel for the sentiment of the crypto market. Using this, traders can gauge when the price of an asset is diverging from its "real" value, and a correction may be imminent.
This allows them to take advantage and profit before the market corrects itself. The RSI is also helpful in identifying good opportunities to enter or exit a trade, making it an invaluable tool for navigating the volatility of the crypto markets.
Another trait of RSI is that it can determine whether a market is overbought (trading at a level above its intrinsic or fair value) or oversold (trading at a level below its intrinsic or fair value), based on values ranging from zero to 100. Typically, an asset is approaching overbought if the RSI is above 70.
The Moving Average Convergence/Divergence, otherwise known as the MACD, is another popular indicator among crypto traders, and it is relatively easy to use and generates strong crypto trading signals. The MACD indicator follows the price trend and helps traders assess whether an asset's short-term price is following its long-term trajectory. If it isn't, there may be a trend change imminent.
MACD doesn't make use of an exact range, so it needs to be used in conjunction with other technical indicators to determine whether a crypto asset is overbought or oversold. However, MACD can let traders know whether trading signals are bullish or bearish according to its oscillating lines and how they cross.
MACD can also help traders identify price divergence. A bearish divergence occurs when the price of a crypto asset is marking a higher high, and the MACD indicator is marking a lower high, or when the price produces a lower high and the MACD registers a higher high. When the price registers a lower low and MACD shows a higher low, a bullish divergence may occur.
One thing that traders should keep in mind when using MACD is that crossovers happen constantly, which means that signals may indicate false positives. This is why MACD should always be used with other tools, rather than stand-alone, to help enhance trading results. Never make trading decisions solely based on the MACD's signals.
Like MACD, a Moving Average (MA) indicator needs to be used in conjunction with other indicators as it cannot help traders assess an asset's immediate performance. Instead, it is what is known as a "lagging indicator" that can display an asset's price movements from previous days.
MA is a good tool for uncovering trends and patterns that can help predict the future price of an asset and identifying support and resistance levels. When the MA starts moving upward, an asset's price rises. When the MA turns to the downside, the asset declines in value.
Bollinger Bands are a commonly used trading indicator favored by technical analysts to measure market volatility. This TA tool shows how prices are dispersed over a typical value. The upper, moving average line and lower band highlight the market extremes of an asset, showing its highest and lowest points and price fluctuations.
At extreme market volatility, the bands expand and move away from the middle band. The bands will contract and move closer to the midpoint when the markets are calmer.
Technical analysis indicators can be helpful for traders to gauge the market and make more informed decisions. However, trading indicators are limited in that they can't predict any external forces that may affect the market, such as global events or unexpected occurrences.
Trading indicators also can't help you to glean deep insights into a project's fundamentals. So, while one asset may look good on the charts, the fact that its founder is about to rug pull the token holders cannot be identified.
Crypto trading indicators are merely tools that can help traders understand a market on a technical level. As always, it pays to remember the golden rules: never trade with more than you can afford to lose and always leave your emotions to one side.
This article is not trading advice. All trading carries a risk.
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Cryptocurrencies are highly volatile, meaning that their prices fluctuate continuously, and often dramatically, all the time. For some traders, this is an opportunity not to be missed.
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