Trading crypto can be a real bummer if you don’t follow some basic rules. Also, when turning into a profitable Bitcoin trader, it is necessary that you should be very patient and can handle things when the markets suddenly turn against you. Trust me on this, it will.
The cryptocurrency markets are still in its infancy and this young market lacks proper regulation and sometimes proper trading volumes. How to survive and be profitable when trading crypto in this volatile market?
In my opinion, trading crypto can be profitable by following a trading plan and use technical indicators as a solid tool. As a matter of fact, for trading crypto successful without getting REKT, it’s a must to use technical indicators the right way. If you are new to trading and want to turn your profits to the next level, this article could help you by explaining the most-used technical indicators when trading crypto.
What are Technical Indicators
Technical indicators are tools used to measure and interpret market behavior. They are often used by investors and traders to assist them with trade timing or to alert them to new trends; whether prices will be going up, down or sideways. Technical indicators are created using mathematical calculations of historical prices and trading volume of the particular asset (or cryptocurrency), in a bid to predict the market trend.
When trading in shorter timeframes, technical indicators are necessary because they are very precise in short term price movements. Because of this, most crypto traders are using them daily or when swing trading cryptocurrency.
Right now, I will explain three of the more popular and commonly used technical indicators when trading cryptocurrencies.
1. Moving Averages
The moving average of a crypto asset can be seen as a trend following indicator. This technical indicator tells you about the price level of a coin based upon its previous prices. Furthermore, the moving average is calculated over a certain number of fixed time intervals. Time intervals can be seen as common periods where the 50 day and 200-day moving averages are mostly used.
How to interpret the Moving Average
The moving average can be graphed as a line on the price chart of a cryptocurrency. There are two types of moving averages, the simple moving average (“SMA”) and the exponential moving average (“EMA”).
Firstly, the SMA is calculated using an average of the previous prices divided by the number of time periods and therefore provides the average price data. Second, the EMA is calculated using the SMA but with a weighted average which favors more recent prices.
In this manner, the main difference between the SMA and EMA is when calculating EMA, recent price data will affect the moving average more. As a result, the older price date will have less impact on the calculations.
Two technical indicators with different calculations
What is the algorithm for calculating the SMA? The calculations for both moving averages are shown below.
The moving average offers insight into the crypto asset by comparing its current price to an average of its prices across a period. Crypto traders usually plot two moving averages of different periods together. Given that these two moving averages have a dependency on price and when a moving average crosses over or under another, it can be seen as an important change in the average trend of the crypto asset.
Generally, when a shorter period moving average crosses above the longer period moving average, it is taken as a bullish signal. When a shorter period moving average crosses under the longer moving average, it is taken as a bearish signal.
2. Fibonacci Retracement
Fibonacci retracement could also be very helpful when trading crypto. Fibonacci was a famous mathematician born way back in the 12th century! This scientist hacked the ‘secret code of life’ by discovering this very famous sequence of numbers. It turns out that every object in our dimension follows this rule. How does this sequence go?
The famous sequence of Fibonacci goes like this: Each number in the sequence is the sum of the two numbers preceding it. So, the sequence goes 0,1,1,2,3,5,8,13,21,34 and so on. Very interesting, but what has this sequence to do with trading?
When crypto trading, the total market seems to follow a certain pattern when going up or down which is called the Fibonacci Retracement. This technical indicator uses horizontal lines that divide the distance between two extreme points on the price chart according to the Fibonacci ratios: 23.6%, 38.2%, 50%, 61.8%, and 100%.
How to draw Fibonacci Lines
Fibonacci lines can be best drawed by identifying the key retracement points.
- Identifying the highest and lowest price in the time frame that you are interested to analyze
- Drawing horizontal lines at each of these price levels
- Divide the distance between those lines by the Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, and 100%)
- Draw a horizontal line at each level identical to point 2
Fibonacci Retracement Lines are used to identify support and resistance levels. The support zone is where cryptocurrency prices do not fall below over some time due to a convergence of demand. Conversely, resistance levels are price levels where an uptrend in cryptocurrency prices faces resistance.
Once the Fibonacci retracement lines are identified it can be used to enter or exit for a trade. When the price of a cryptocurrency approaches the retracement lines, there is a possibility that the price of a cryptocurrency will either bounce off the line or cross the line to reach the next support or resistance level.
3. RSI technical indicator
When it comes to analyzing charts with crypto trading, RSI as an indicator is very popular. This technical indicator is very powerful once a trader wants to know the actual momentum when trading. The RSI is determined with a 2-step calculation shown below.
The RSI is generally measured over a 14-period timeframe (it could be 14 hours, days or months depending on what your period of interest is). Through the formula above, you can see that RSI will rise as the number and size of positive gains increase and decrease when losses increase. The RSI is calculated on a scale of 0 to 100 and is usually shown as a line graph on charting applications.
How to use the RSI indicator
Cryptocurrency traders mostly use the RSI indicator to determine if a trend or direction a crypto coin is in is about to change. First, there are the centreline crossovers which is positioned at 50. When the RSI indicator crosses this line in a positive direction, the trend is bull. On the other hand, if the RSI indicator crosses this line downwards, the trend is bearish.
Secondly, this technical indicator has also magnitude up(70) and down(30) levels. An RSI value of 70 and above indicates that the cryptocurrency is becoming overbought, signaling a negative correction in the near term where prices will adjust downwards. Conversely, an RSI value of 30 and below indicates that the cryptocurrency is becoming oversold and suggests an impending positive correction. How to visualize this?
Most used trading tool among Crypto Traders
Now that you have been introduced to the most commonly used technical indicators it’s time to use these helpful trading data. Currently, there are many tools in the markets to do so, but most of them are expensive or rather slow. In my opinion, Tradingview is a favorite because it’s easy to use and fast. Also, it’s possible to sign up with a free account that allows you to add up to 3 technical indicators into your charts. Pretty nice!
Technical analysis is undeniably an important tool for traders. However, it is important to bear in mind that it is a statistic-based analysis tool. As a result, it is not to be taken for granted or a 100% certain way to predict price movements. While the technical indicators you have selected may indicate a certain price direction, there are certainly instances where the market moves in a direction different from that being suggested. Therefore, before taking a position in the market, it is crucial to do your research thoroughly and to take appropriate steps to mitigate risks. Happy crypto trading and be #SAFU!
Disclosure: This post contains affiliate links. This means I may make a small commission if you make a purchase. This doesn’t cost you any more but it does help me to continue publishing cool and actual content about Bitcoin & Crypto – Thank you for your support!
Latest posts by Jelmer Steenhuis (see all)
- 10 Secrets To Success in Bitcoin Investing - October 17, 2019
- Most Used Technical Indicators When Trading Crypto - October 4, 2019
- Best Ways To Get Free Bitcoin Instantly - October 2, 2019