5 Great Crypto Trading Indicators and How to Use Them

The volatility of the Cryptocurrency market challenges even the most seasoned traders. A crypto worth $400 could lose 45 percent of its value in a week and gain it back in a day.

Many traders rely on market structure to make informed predictions. However, in a market where a tweet from a certain billionaire can upend existing market structure, smart traders need all the tools at their disposal to help them traverse the charts and make good calls. Unfortunately, there are hundreds of indicators and some will lead you astray if you don’t know what you’re doing.

Luckily, many of the popular indicators traders know and love can be used to analyze the crypto market. Here are some of them.

Relative Strength Index

The relative strength index shows whether securities are overbought or oversold. Traders often use 30 and 70as the oversold and overbought thresholds respectively.

When a crypto’s price is above 70, it’s naturally a good time to sell or at least hold off on buying as the price is more likely to correct. When RSI is below 30, it’s a signal that the crypto has been oversold and a correction to the upside is more likely.

However, when it comes to cryptocurrency, following this rule hook, line, and sinker could exclude you from some profitable opportunities.

For one, cryptos are known to trade at high RSIs for long periods. A coin could trade at an RSI of 75 and rise to 90 before coming down to the 70s range and going up to 80-90 again (as shown below).

The image above shows the price action chart for Binance Coin (BNB) on the daily time frame. The circles on the RSI chart mark points above 70.

We see that the RSI reached 72 on the 1st of February, 2021, signaling that the coin is in overbought territory. The RSI continued to rise, reaching another peak of about 86.59 five days later (the 6th).

The RSI then dropped to 76.89 the next day (the 7th), rose and fell a few more times before finally falling below 70.

The elapsed time between the first circled point and the last is 21 days (from the 1st February to the 21st February).

The corresponding price increase was astonishing $280. BNB closed at $52.7 on the 1st of February and at $332.7 at the 94.65 RSI.

Any trader, especially beginners without knowledge of the crypto market, who stuck to the conventional overbought and oversold levels would have missed out on this profit opportunity.

Fibonacci Retracement

The Fibonacci retracement works across the board and is particularly great for cryptos. It is used to mark out possible support and resistance levels between two points (usually a swing high and a swing low) when the market pulls back during a trend. This indicator is derived from the golden ratio.

The golden ratio, discovered by Italian Mathematician, Leonardo Fibonacci, describes predictable patterns seen throughout nature and is used as a research tool in technical analysis.

A swing low is the most recent lowest point within a given time frame, usually bounded on both sides by higher lows, while a swing high is the most recent highest price reached within a particular time frame bounded on both sides by two lower highs.

Swing highs and lows are usually the points before a change in market direction. This change can be a trend reversal or a pullback. Ideally, Fibonacci Retracement is used when the change is believed to be a pull back after which the general trend resumes.

The regular Fibonacci levels include 0.00%, 23.60%, 38.20%,50.00%, 61.80%, 76.40%, and 100.00%. Levels can be extended beyond this range (e.g., -61.80%), according to the ratio.

Fibonacci retracement is best used during an uptrend after a swing high or in a downtrend after a swing low. To use Fibonacci, place the first point at the last swing low and the second point at the last swing high (if in an uptrend).

In the chart above, the price is hovering around the 50% level, which is a common occurrence during pullbacks.

Simple Moving Average

The simple moving average and its sister indicator, the exponential moving average, are the most popular indicators among crypto traders.

The SMA averages the closing price over a set number of days. This averaging smooths out price fluctuations, giving a clearer representation of price movements.

The Moving average can be set to custom time frames. Some popular ones are the 9-, 20-, 30-, 50-, 100-, and 200-day time frames. A 9-day SMA is the average (arithmetic mean) of closing prices for the last 9 days.

Ultimately, the moving average shows the prevalent market trend.

The moving average can also be used as a dynamic resistance or support line. The point where candles close at and bounce off the resistance line can be used as an area of value when taking positions.

For example, if price touches the MA line and bounces above it in an uptrend (see red circle above), a buy position can be opened. Note that for the example above, market structure must be in an uptrend.

Exponential Moving Average

The only difference between the exponential moving average and the simple moving average is that the former places more emphasis on recent closing prices to reflect the realities of the current market conditions.

Traders can use EMAs as signals for potential price movements by plotting two EMAs against each other— one for a longer timeframe and another for a shorter time frame.

For example, take the 20-day and 50-day EMA. Because the 20-day is shorter, it moves faster than the 50-day and will cross above or below it when the market is in an uptrend or downtrend.

If the 20-day EMA crosses above the 50-day EMA, it means prices have started to rise significantly. If the 20-day crosses below the 50-day, then prices have started to fall.

Keep in mind that “significant” price movements depend on the time frame you’re trading.

The chart above shows a 20-day EMA (the black line) and a 50-day EMA (the green line). When prices start to fall, the 20-day EMA crosses below the 50-day EMA. When the price of the crypto starts to rise, the 20-day EMA crosses above the 50-day EMA.

These crosses act as buy/sell signals.

To get more signals(crosses), use time frames that are closer to each other e.g. 20-day and 30-day EMAs. To get fewer signals, use time frames that are farther apart e.g., 20-day and 100-day EMAs.

Moving Average Convergence Divergence MACD

The MACD shows the strength and direction of market momentum.

The MACD is obtained from the difference between the 26-day and 12-day EMA. The result is plotted against a 9-day EMA line, called a “signal line”.

MACD crossings—when the MACD crosses the signal line— can be used as buy/sell signals. An upside cross is seen as a buy signal while a downward cross is seen as a sell signal.

The MACD also comes with a histogram that shows the strength of the momentum by measuring the distance between the MACD line and the signal line. The histogram is plotted at a fixed point of reference called a baseline.

In the chart above, the MACD line is the blue line, while the yellowish line is the signal line.

The distance between the MACD line and the baseline also shows the trend of the market. When the MACD line is above both the baseline and the signal line, the market is said to be bullish.

When the MACD line is below the baseline, the market could be in a downtrend. However, when the MACD crosses below the signal line but is well above the baseline, it is most likely signaling a pullback.

In the chart above, the MACD crossed below the signal line, but was still high above the baseline, signaling a pullback.

Final Words

Note that while indicators help signal important changes in market structure or price action, they are not magic crystal balls. They could signal a change in market structure that turns out to be a false break out. At other times, traders read them wrong.

Also, remember that no indicator is self sufficient, they should be combined with others for more accurate readings.. These indicators are not the only ones available, there are Bollinger bands, Stochastic, and many others.

The key is mastering a few. Happy trading!