What are the best crypto trading indicators?
For as long as trading has existed, trading indicators have been developed to serve as a useful tool that helps traders make informed predictions on their positions. And this development has continued alongside the growth of crypto.
As a trader, you're likely looking for ways to increase your trading performance using the best available indicators. Understanding what indicators are, how they work, and what and when to use them are essential foundations to getting started.
This article covers all of these topics, including specific indicators that have proven to be some of the most reliable.
So, let us begin by understanding what trading indicators are.
What is a trading indicator?
A trading indicator is a technical tool that utilises graphs and mathematical formulas to indicate a market's direction. Crypto traders or investors use an indicator in tandem with a trading chart to analyse market conditions. The basic idea is to study past market movements and then use them to anticipate future price trends and patterns.
Although indicators should point you to where the market is headed, it is important to mention that they do not predict the prices of Bitcoin or other crypto assets in absolute certainty. The overall goal is to help you identify trading opportunities in order to maximise profit while minimising loss.
Let us now consider the two common categories of indicators and their functionalities. After this, we'll walk you through the essential things you need to know about indicators.
Types of trading indicators
Although there are different trading indicators, they generally fall under two distinct categories: Leading and Lagging.
Leading indicators vs. lagging indicators
Leading indicators tend to focus on predicting the future outcome of price action. Consider it like looking through your car's windshield to see the road ahead of you. From your view, it is possible to anticipate what you should do based on what you can see ahead. Similarly, a leading indicator can provide a signal ahead of time before the actual price action happens and can register the momentum of the price action when it slows down or speeds up.
On the other hand, lagging indicators pay more attention to what price action used to be like in the past. Think of it like looking at the rearview mirror, which you can use to look at the road you've travelled. Lagging indicators provide the signals you need to confirm the behaviour of the price action.
Trading indicator subtypes
Besides the two primary indicator types we've discussed so far, others can further be sectioned based on how they calculate price action to provide the signal. Consider some of them.
Trend indicators are a subset of lagging indicators. When signals become unclear, they provide an objective measure of an asset’s price direction to ascertain the strength of a trend. With it, price data smooths out and is usually represented by a single line, helping traders find the best entries and exits for their trades.
Volume indicators are used to determine the strength of a trend or to confirm the direction of a trend considering the movement of the volume. A high volume means the prices will keep up with the upward trend. On the other hand, if the volume is low, the trend could experience a drop soon.
The crypto market is generally known to be volatile. A volatility indicator can measure the rate of price movement irrespective of the direction it takes. When the market experiences high volatility due to a fast up and down price swing, traders can use them to study the right moment to buy or sell despite the fluctuating market condition.
An oscillator indicator, also known as a momentum indicator, is a leading indicator type that aims to identify a possible trend in terms of the speed of the price movement that is yet to start. It does this by comparing the prices over time. These indicators move or oscillate between two (above and below midpoint) limits to gauge the trend's strength and momentum. In short, oscillator indicators typically direct traders to understand when a market is overbought or oversold.
The best crypto trading indicators
Now that we've covered what trading indicators are, let's highlight some of the best indicators for crypto trading.
#1 – Relative Strength Index (RSI)
The RSI is a momentum indicator (or oscillator) developed by a technical analyst, Welles Wilder, in 1978. Using a complicated formula, it can measure the movement in a price change and the speed and magnitude of change in price by evaluating the oversold and overbought conditions.
The range of the RSI formula is between 0 and 100. An asset is considered to be oversold when it moves below the 30-range area. If the value goes above 70, the chart enters the overbought region. In some cases, such as during sustained trends, the indicator relaxes in the overbought or oversold territory for long periods.
Once deployed to the chart, the RSI indicator is signified by a single line that moves sideways between two parallel lines.
Many traders have found that combining RSI with other indicators can be helpful. It helps them decide whether to remain in the market or seek an exit. In other cases, this indicator can guide a trader to detect divergence signals for bullish or bearish market conditions or even for an exaggerated divergence.
#2 – Moving Averages (MA)
The MA, as a lagging indicator, is a popular tool used in the Bitcoin and crypto market. Its primary purpose is to show the average price of a specified number of recent candles. Or in other words, it smooths price action over a given amount of time.
Thus, if you set up a moving average indicator, you can modify the number of periods you want to consider. In this context, a period represents a unit of time-based on the chart's observed timeframe. The MA you opt for as a trader depends on your trading style.
For example, traders often use the 20-period, 50-period, and 200-period timeframes. With this set of timeframes, traders can identify the general direction of the crypto asset based on the chosen data set over time.
A trader’s approach is determined mainly by the time frame chosen. For instance, day traders often find the 20-period moving average practical due to its shorter time frame. Elsewhere, the 200-period moving average is better for long-term traders who can patiently monitor the trends. The MA still acts to give a trader a great indication of support and resistance levels.
Main types of moving averages
It should be noted that moving averages come in different types. These moving averages effectively calculate different time frames but work even better when deployed in combination.
Simple Moving Average (SMA)
While the moving average indicator shows the average price only, the SMA helps a trader calculate the price of a cryptocurrency over a timeframe using a predetermined set of data.
The formula for calculating SMA:
SMA = A1 + A2+ …… + An
where; A is the average price
n is the time period
Considering all prices to be equal, the SMA allows traders to see the average price action. The SMA indicator changes its position the moment a new candle shows up.
Smoothed Moving Average (SMMA)
The SMMA is similar to SMA but is a bit more complex. The advantage is that it reduces noise rather than reduces lag. Additionally, it takes all price actions into consideration using a long lookback period. In essence, the SSMA narrows down the trend analysis, giving a clearer perspective to define support and resistance areas.
Exponential Moving Average (EMA)
The EMA indicator gives a smoother price action than the SMA over a short period by removing short-time price fluctuations and reducing lag. Priority is given to data within the time frame being considered. Therefore, the EMA trendline is suitable for quick crypto trading decisions. This makes it a perfect tool for a day trader to analyse the market to get a more reliable and accurate trend.
However, the EMA is very sensitive when responding to the trend. This may confuse a trader. It is recommended to use other compatible indicators to determine the most accurate buying opportunity.
The EMA calculation formula is as follows:
EMA = Y + [K × (X − Y)]
Where: X = Current price
Y = Previous period's EMA (SMA is used for the first period's calculations)
K = Exponential smoothing constant (this gives the appropriate weight to the most recent prices, utilising the specified period in the MA)
Weighted Moving Average (WMA)
The weighted moving average or WMA is another type of moving average to consider. The primary function of WMA is to measure the trend direction of a crypto asset, and it does this faster than SMA. Its primary focus is to provide data from recent daily closes on an asset and forecast market movement in the short term. It is another indicator that is suitable for short-term traders. Best used in combination with other moving averages.
WMA = Price1 x n + Price2 x (n-1) + …… Pricen
n x (n+1)
From the formula above, WMA assigns a number for each price average, multiplies them by the period, and then is divided by 2.
#3 – Bollinger Bands (BB)
The central idea behind Bollinger bands is to highlight how crypto prices are dispersed across an average value. BB is defined by a set of trendlines directed toward two (negative and positive) standard deviations as prices move away from a simple moving average (SMA). The two bands can be used to determine the support and resistance levels.
Bollinger bands are composed of three main components:
- The upper band (positive) – 20-period standard deviation (x2) + 20-period SMA
- The middle band – 20-period standard deviation (x2) + 20-period SMA
- The lower band (negative) – 20-period SMA
The standard deviation calculates the market volatility or the difference between the values or prices from the average price/value position with the SMA. The BB settings generally follow the 20-day set of periods for the lower and upper bands to two standard deviations. However, the settings can be adjusted according to preferences.
Many traders have found that when the prices move towards the upper band, it signifies an overbought market. This is because, at this point, the underlying price begins growing unusually. If, on the other hand, the price starts to shrink unusually and tends towards the lower band. In that case, the market is considered to be oversold.
The bands' contraction and expansion indicate that the market is either becoming less volatile or more volatile, respectively.
The formula for calculating Bollinger Bands:
BOLU = MA (TP,n) + m∗σ [TP,n]
BOLD = MA (TP,n) − m∗σ [TP,n]
BOLU = Upper Bollinger Band
BOLD=Lower Bollinger Band
TP (typical price) = (High + Low + Close) ÷ 3
n = number of days in smoothing period (typically 20)
m = number of standard deviations (typically 2)
σ [TP,n] = Standard Deviation over last n periods of TP
#4 – Moving Average Convergence Divergence (MACD)
The MACD indicator is a simple tool that can provide a strong trading signal. The convergence refers to the two sliding moving averages that move towards each other, while the divergence is when the two underlying moving averages separate from each other.
When deployed, the MACD gives meaning to both the trend and momentum of the prices. Here, trend and momentum refer to when a growing asset continues to rise (bullish) and when a falling asset continues to go lower (bearish).
The general rule when using this indicator is to note when the MACD line moves above zero. This indicates a positive upside trend (bullish), meaning it is a good entry point. However, suppose the line goes below zero. In that case, the general direction is downward (bearish), meaning a good time to exit the market.
The bullish trend becomes weakened when the simple moving average line starts to fall simultaneously and when the price forms new values. Next, a price fall is expected, resulting in what is known as trend divergence. This outcome is a perfect predictor indicating that there could be a reversal.
#5 – MYC Trading Indicator
The MYC indicator is a private indicator that merges trend analysis and momentum oscillators to accurately ascertain when a cryptocurrency will set foot into a bearish or bullish trend.
One unique feature of the MYC is the trendline. The trendline helps traders identify whether a long signal will be produced when the price rises, and whether or not a short signal will be formed when the price falls.
Another exciting aspect of the MYC is that, unlike the RSI or Bollinger Bands, it not only provides exit points but also recommends entry points to help traders focus on their actions.
#6 – Ichimoku Cloud
Ichimoku cloud, also called Ichimoku Kinko Hyo, is quite a visual indicator efficient for crypto trading. It's a combination of technical indicators that explicitly utilises support and resistance levels to indicate a crypto market's inclusive strength and direction.
It comes with five main components of lines, namely:
- Conversion Line (Tenkan-sen)
- Base Line (Kijun-sen)
- Lagging Span Line (Chikou)
- Leading Span A (Senkou A)
- Leading Span B (Senkou B)
These lines cross each other, creating a cloud. If the expected price moves above the cloud, the trend is up. But when the price moves below the cloud, the trend is down. A mono-directional movement indicates that the price would remain the same.
To effectively interpret the Ichimoku Cloud, keep these important facts in mind:
- Begin by identifying the Leading Span A and Leading Span B
- When the Leading Span A is below Span B, it means crypto is in a negative direction, represented by a red cloud
- If the Leading Span A is above Span B, there's a green cloud, meaning the crypto is gaining momentum.
- The thicker the clouds, the stronger the trend
- Prices breaking above or under the cloud show a trend reversal
Additionally, it should be noted that the Ichimoku Cloud is a valuable indicator for day traders, especially using the edge-to-edge cloud setup. However, using the Ichimoku Cloud in tandem with other indicators is recommended to confirm trends and minimise risks of crypto trading.
#7 – Fibonacci Retracement Indicator
The Fibonacci retracement levels are popular and helpful crypto trading tools that can help traders identify turning points in cryptocurrency prices. They provide hidden levels in the form of horizontal lines, indicating when to expect support and resistance levels on a given price chart.
The main levels are 23.6%, 38.2%, 61.8%, and 78.6%. These retracement levels are not mere random numbers. Rather, they are derived from Fibonacci's sequence, a mathematical formula introduced by an Italian mathematician in the 13th century. Most traders in the financial sectors use them when analysing a price chart to determine potential turning points.
For instance, the price of a crypto asset under consideration would likely bounce off a Fibonacci support level during a completed uptrend. This could be the right moment to enter the market. Also, the resistance level could be an excellent point to take profit and close a trade in the expectation of a reversal.
In contrast, an established breakout on support or resistance might serve as a good entry point for a trade that's right in the direction of the trend. This is because the breakout is flipped once support or resistance is broken. The broken support converts to resistance, while the broken resistance becomes support.
#8 – Stochastic Oscillator (SO) Indicators
The stochastic oscillator is a handy leading indicator used to determine the strength of the momentum of a given trend. It compares the asset's closing price with its high-low range over a certain period. Even better, the SO functions well regardless of volatility, even in the fast-moving cryptocurrency market. The speed at which it reacts depends on the settings.
The SO indicator is comprised of two plot lines, namely the %K and %D:
- %K = (last closing price – lowest price) / (highest price – lowest price) x 100
- %D = 3-day SMA of %K
- %K = ratio between the growth of the current closing price from the period low to the period low/high range
- %D = average %K over the last 3-day periods
Both plots move between the ranges 0 and 100. Traditionally, when the line is below 20, it becomes oversold. But if it is above 80, it is then considered overbought. However, in some instances, during a strong trend, oversold or overbought conditions may simply lead to consolidation in a sideways movement in price.
When the %K line crosses over to the %D, the current momentum is higher than the 3-period average; an upward trend may be incoming. This is because the price is thought to follow momentum, and the intersection of the two plots signals a sizeable day-to-day momentum shift.
The stochastic oscillator can drop below 80, provided the market consolidates sideways. This does not necessarily indicate a time to sell. Rather, it implies that the buying momentum has washed out for the moment.
Combining trading indicators
Many skilled traders have found that combining the right indicators in different market conditions gives them a more accurate trading experience. Since market conditions continually change from ranging to trending and back again, you can use each indicator to your own advantage according to its strength.
But of course, using them properly can be a real challenge, especially if you're yet to master your trading strategies. Here are a few tips to keep in mind.
Avoid overloading charts with the same information
Once it becomes clear how valuable indicators can be, there can be a tendency to use too many indicators on one chart. For example, if a trader has added three oscillating indicators below a chart, then there are three indicators providing the same information.
Adding more indicators that supply the same information to a chart will not make them more reliable. They simply show the same overbought and oversold information differently and will only muddle up your chart space.
Combine indicators from different categories
A smart way to arrange your crypto trading indicators is to combine the ones that belong to different categories. For instance, a trend indicator like a moving average will combine powerfully well with a momentum indicator like RSI. This is because while the moving average presents the direction of the trend, the RSI would display the trend's strength.
Trading indicators vs. your own strategies
A trading strategy is a comprehensive plan you need for executing your trading activities. It involves setting up a plan, a set of goals and objectives, risk tolerance, and following a set of rules to define when an action should be taken in the market. In short, it is an intended framework that guides your trading endeavours. The goal is to help mitigate financial risk, eliminating a lot of unnecessary decisions.
To get the best of your strategy, you must develop ideas and best practices based on your research to make an informed decision. Understandably, creating a profitable trading strategy can be challenging since it goes beyond the basic method of buying high and selling low.
Here, consider some essential facts you should embrace when developing a trading strategy:
- Know the classes of assets you want to trade
- Determine whether you're going for short-time or long-time trading
- Select the type of setup you want to adopt
- Choose the tools and indicators you want to use
- Determine your risk tolerance
- Document and measure your portfolio performance
- Recognise what triggers your entry and exit placements
- Know what determines your position sizing
The overall goal of using crypto trading indicators is to help you interpret market conditions in order to identify trading opportunities. The tools analysed in this article are a start and incredibly handy for your trading journey.
But then, you should know that indicators alone do not make trading signals. It would help if you defined what method to use based on the functionality of a particular indicator to signal a trade. Even better, many of these indicators can complement each other when used correctly.
Predict your favourite cryptos' next moves with Hourly Asset Analysis - only in the SwissBorg app!
You may also like