Crypto traders do a lot of analysis before engaging in any trade. One of such analyses is technical analysis. This is analysis that takes into account all the technical factors involved in market movements, and is a critical aspect of successful trading.
Technical analysis uses indicators, which are tools used to check the trends and where a market is likely to go, in order to make informed trading decisions. Although the market is the same, every trader has his own preferred combination of technical indicators he uses to assess the market.
If you’re just starting out and not quite sure which technical indicators to use, the following are some of the most important indicators you can use when analyzing the market. You can use any combination of the indicators to have a better grip over your trades.
Relative Strength Index (RSI)
RSI is a momentum indicator that tells you if an asset is overbought or oversold. An overbought asset is one that has reached its peak in a rally and about to drop as investors harvest their gains. An oversold asset on the other hand is one that has reached such a low level in its price that it may be preparing to bounce.
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While there are no absolutes when it comes to RSI, an RSI of over 70 out of 100 is generally considered to be overbought, and an RSI of under 30 is considered to be oversold. Still, just looking at the RSI may not be a good reason to become bullish or bearish about a market, so it’s safer to use it alongside other indicators to get a better picture of the market.
Moving Average (MA)
This is another important indicator that traders use to determine the direction the market is going. It is a lagging indicator because it uses past market data to predict future direction. There are many types of moving average, but the most commonly used are simple moving average (SMA) and exponential moving average (EMA).
The SMA or just MA is the average price of an asset within a defined period while the EMA is calculated in a similar manner, but gives more weight to the most recent price changes.
Moving averages generally give traders an idea of the market’s current direction when compared to the current price. For example, if the price of the asset remains higher than the moving average, the market is said to be bullish. On the other hand if the current price is below the MA, the market is generally thought to be bearish.
Bollinger Bands (BB)
Bollinger Bands measure the level of volatility in the market, and can also tell if an asset is overbought or oversold. The bands are made up of three lines, namely an SMA (the middle band) also known as the trendline, and an upper and lower band.
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How far the lower and middle bands are from the trendline tells you the level of volatility of the market. The farther away they are, the higher the volatility. Also the closer the price is to the upper band, the more overbought and the opposite is the case when it is closer to the lower band.
Moving Average Convergence Divergence (MACD)
The MACD tells traders how strong an existing trend is. It shows the relationship between two moving averages, and has two lines – the MACD line and the signal line. An increasing price with a decreasing MACD could be a sign that the market could reverse soon, as the momentum is fading.
Also just like the normal moving average, a higher MACD than the current price is a bullish sign, while a lower MACD is a bearish sign.
Stochastic RSI (StochRSI)
This is an indicator derived from the RSI rather than market data, that helps traders determine if an asset is oversold or overbought. The value can range between 0 and 1, or 0 and 100 as is the case with RSI.
A StochRSI above 0.8 is considered overbought, while one below 0.2 is considered to be oversold. As with the RSI, the readings don’t absolutely mean that a momentum is about to reverse, it simply tells you that the RSI is at its extreme reading.
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