Technical analysis and trading strategies are not limited only to stocks, they can also be applied to cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH).
The trading indicators are similar, but there are certain nuances that separate crypto trading from stock trading. For example, crypto traders have to weather greater volatility and have a shorter history to work with, hence some indicators work better for crypto trading than others.
In this article, we will be discussing the best technical indicators for crypto trading, and the best part is that they are all available for free.
I hope these indicators can help you make better investment decisions, decide when is a good time to enter and increase your chances of success in the cryptocurrency market.
What Are The Best Indicators For Crypto Trading?
1. Simple Moving Averages (MA)
Simple moving averages calculate the average of price movements in a given period. It is an easily accessible indicator that gives traders an idea of the price trend, based on historical price movements.
You can customise the period of your moving average based on your trading timeframe. Commonly, a 20-day moving average is used for short term investing while a 50- or 100-day moving average is used for longer term trades.
In general:
- Buy signal: when the price goes above the simple moving average
- Sell signal: when the price falls below the simple moving average
Where to get the moving average indicator for crypto trading?
You can get moving averages on TradingView, here’s an example using a Bitcoin daily chart:
Word of warning, if you’re using a moving average with a shorter time frame, you should be aware of ‘whipsaws’ where price drops below the moving average and shoots back up quickly.
These can be smoothen out by using a moving average of a longer time frame instead. Or…
Use two MAs for more confidence
Another common practice crypto traders use is to rely on two MAs instead of just one.
For example, pairing 20 day MA and 50 day MA on a daily chart can help a trader identify entry and exit points with more confidence. Here, the signals are slightly different:
- Buy signal: when the shorter MA goes above the longer MA
- Sell signal: when the shorter MA goes under the longer MA
Here’s an example:
If you want an indicator that’ll tell you even more, let’s move on to:
2. Moving Average Convergence/Divergence (MACD)
The MACD is one of the most popular and widely used indicators in technical analysis. And is commonly used by trend following momentum traders to identify directions of market trends.
It works by tracking the relationship between a shorter and a longer exponential moving average (EMA). Unlike simple moving averages, the calculation for exponential moving averages gives latest data more weightage and is said to be more sensitive to price movements.
There are three parts to the MACD indicator:
- MACD line: plotted using 26 period EMA – 12 period EMA.
- Signal line: plotted using the 9-day EMA. It is used to spot trend reversals and price swings and as its name suggests, serves as a buy/sell signal.
- Histogram: plotted by taking MACD – Signal, this summarise the relationship of MACD and Signal.
In general:
- BUY signal = when MACD line crosses Signal line from below
- SELL signal = when MACD line drops below Signal line from above
- Uptrend = when both MACD and Signal lines are moving upwards and Histogram is above zero.
- Downtrend = when both MACD and Signal lines are moving downwards and Histogram is below zero.
You’ll notice that the movement of the histogram is in line with the buy and sell signals.
Where to get MACD indicator for crypto trading?
I know, the above is too complicated to calculate manually. Good news, the MACD is so popular that most trading platforms offer it as a standard indicator.
Here’s an example from TradingView, using a Bitcoin weekly chart:
The MACD relies on moving averages which are calculated using historical data. This means that the indicator can be lagging and you will not be able to catch the extreme tops and bottoms.
However, it has been proven to be reliable and has remained a popular indicator for decades.
Moving averages give you an idea of when to buy and sell based on previous prices. If you feel that price alone is not sufficient, then you can consider using the next indicator alongside moving averages:
3. On-Balance Volume (OBV)
On-Balance Volume (OBV) is a cumulative indicator that uses volume flow and closing prices to predict future price movements.
- If price closes higher than yesterday, volume for today is added to total OBV and OBV goes up.
- If price closes lower than yesterday, volume for today is subtracted from total OBV and OBV goes down.
- If price closes at the same rate, OBV is unchanged.
So what does OBV tell you?
It’s pretty straightforward.
When OBV is increasing, it means buying pressure is high and investors are willing to pay a higher price for the cryptocurrency. In such cases, if the crypto price is also making higher highs, then the upward trend will likely continue.
When OBV is decreasing, it means selling pressure is higher and signals a bullish trend. If the crypto price is making lower lows alongside the decreasing OBV, then the downward momentum is likely to continue too.
When OBV and price do not agree, it suggests that the momentum will likely slow down or stop.
Sounds pretty obvious right?
OBV shines when price is trading sideways as it could suggest that a breakout may occur soon. When OBV is increasing during a sideways market, an upward breakout may be on the way. The opposite is true too.
The downside to relying on volume is that a sudden spike in volume may render the OBV indicator inaccurate for a while. Hence, OBV is seldom used alone, instead it is usually paired with MACD or RSI (which we’ll learn next).
Where to get the OBV indicator for crypto trading?
You can get the OBV indicator via TradingView as well, here’s an example using a daily chart on Bitcoin:
So far, we’ve learnt three crypto trading indicators that help us better identify when to buy and sell.
Next, we’ll explore indicators that tell us if a cryptocurrency is undervalued or overpriced.
4. Relative Strength Index (RSI)
The Relative Strength Index was developed by Welles Wilder, a mechanical engineer, real estate developer and technical trader in 1978. It has been used by crypto traders to understand the market sentiments and to identify if a cryptocurrency is overpriced or undervalued.
The RSI is an oscillating indicator with values in the range of 0 to 100, where closer to 0, an asset is oversold or undervalued and vice versa. In crypto trading, commonly used levels are:
- When RSI is more than 70, the crypto is overpriced
- When RSI is less than 30, the crypto is underpriced
RSI is calculated using the following equation:
RSI = 100 – (100/(1-RS)), where RS = Average Gain / Average Loss
Most formulas use a 14 day period to calculate the average gain and loss, but you can adjust the time frame based on your trading strategy.
Where to get RSI indicator for crypto trading?
You can also find a RSI indicator within TradingView, out of the box, it uses a 14 day period which you can modify via the settings.
Again, here’s an example using a Bitcoin weekly chart:
As you can see, in the 2021 bull run, Bitcoin prices were overbought as it hit new highs. But fast forward today, prices seem oversold as the market has cooled down since the start of the year.
5. Bollinger Bands
Developed by John Bollinger in the 1980s, the Bollinger Bands gives crypto traders an idea of whether an asset is overbought (aka overpriced) or oversold (aka undervalued) by incorporating price movements with volatility into its calculations.
The Bollinger Bands are made up of three lines:
- Centerline: A simple moving average
- Upper Band: 2 standard deviations above the MA
- Lower Band: 2 standard deviations below the MA
The range between upper and lower band will tighten and widen depending on the volatility of the asset – when volatility is higher, they will widen and when volatility is lower, they will tighten.
A common timeframe for the Bollinger Bands centerline is a 20 day MA with the upper and lower band being separated by 2 standard deviations. For a longer timeframe, you can consider using a 50 day MA.
Advanced traders may also tweak the standard deviation to cater to specific cryptocurrencies.
How to use Bollinger Bands?
Generally, the closer price is to the upper band, the more overbought the cryptocurrency is. And the opposite is thought to be true – the closer the price is to the lower band, the more oversold the asset is.
Also, with Bollinger bands, price tends to move towards the centerline. Hence, another way to use this indicator is to look out for Bollinger Bounces where when price moves above the upper band or below the lower band, there is a high chance that price will reverse soon.
Where to get Bollinger Bands indicator for crypto trading?
Likewise, you can access Bollinger Bands via TradingView. Here’s an example of the Bollinger bounce in action:
Do note that this can be quite subjective and there are cases where prices can walk along the upper or lower bands for a while before reverting to the centerline. You might find it useful to combine both bollinger bands with the moving average before deciding if you should make your next move.
Summary
I’ve covered 5 best indicators for crypto trading above. Ideally, you should be using multiple indicators in order to get a better idea of the current market sentiment and to make better trading decisions.
For example, Alvin used an indicator similar to the MACD with exponential regression and a quality filter to generate a list of cryptocurrencies with high momentum previously, you can read about his momentum trading process here.
If you wish to use indicators which are more specific to trade Bitcoin more efficiently, I shared two on-chain metrics for Bitcoin previously.
I hope that this article has been a useful introduction for you, good luck out there!
P.S. if you’re want to invest in crypto but don’t know where to start, let AK give you the fundamentals at this free crypto masterclass.
