5 Most Used Technical Indicators to trade cryptocurrencies
Technical indicators that help understand the best buying and selling points, bringing peace of mind to traders
Technical Analysis by Neologica Software
·8 min read
Technical indicators are one of the most widely used resources in the interpretation of any given market. They are useful for the trader to exchange many assets. Commonly, they are used for the stock market, futures market, Forex… as well as for cryptocurrency.
The reason is simple: technical indicators help traders understand the best buying and selling points, thus bringing peace of mind. But know that professional traders do have their favorites within these indicators! In this article, we bring you 5 most commonly used indicators for cryptocurrencies! Continue reading below.
Technical Indicators: Understanding the Basics
Technical indicators are basically mathematical formulas created by traders and are used as a reference in some markets. The question is, why are they used as references? The reason is that they’ve helped, at some point, to understand the whys of the market: bullish, bearish as well as the reasons behind consolidation.
There are several types of indicators: oscillators, trackers, volume indicators, among others. Understanding what each indicator means is an excellent way to understand trading. Follow along to discover the main indicators for trading in cryptocurrencies.
The moving average is certainly the most basic indicator in the market. Its simplicity to use and interpret has made this indicator remain solid over time as one of the favorites among traders.
The moving average, in short, calculates an average price of an asset based on its previous periods, for example: a moving average of 21 periods, calculates the average price of these 21 periods. If the period is 21 days, then the average price of these 21 days is shown. If a 5 minute chart is provided, then the moving average takes the chart as the basis for forming a period as well as the average price.
And why is the moving average so useful for the market? If we know the average price of an asset, we can interpret the market trend by analyzing the slope of the curve, thus identifying the best prices to buy and sell
We know that a given cryptocurrency, no matter how good and innovative its design is, will never go upwards indefinitely. It will have upswings with corrections (returns to a lower point) and then keep going up. Any asset is like that. In this way, the moving average makes it easier to understand the best buying prices in the correction of an uptrend.
How to use the moving average?
If a cryptocurrency is trending (rising tops and bottoms), by using a price average, it is possible to make a buy at a low price and sell at a high price.
One of the biggest mistakes traders make in the cryptocurrency market is to buy at a high point and sell at a low point. This is a crucial mistake in the long run. It is important to reinforce that, in trading, knowing when to buy and sell is fundamental. No matter how good the cryptocurrency is in terms of it’s fundamentals or how good your project is, in trading, identifying the best prices at the moment of operation is the key point.
That way, if the market is bullish, you will notice that the averages tend to lean upwards. And in the returns to the averages (a classic strategy), there is an opportunity to exchange in favor of the trend.
A question may arise: “what is the best averaging period?” The answer is stated below:
Long or short averages?
One of the most asked questions byis which average to use. The answer is simple: it depends. It depends on the chart you are following (timeframes), the crypto asset being analyzed, whether you’re searching for higher or lower targets, among other factors.
Evaluate these points:
- Merge the chart you’re following with your gain and loss targets: If you’re seeking more elongated trades during the day, it would be interesting for you to use a chart with a shorter timeframe and higher average.
- Using slow averages facilitates more elongated trades, with larger gains and losses. Using shorter averages tends to shorten your gains and consequently your possible losses.
- Practice test: The best practice is gained by testing. Understand how the averages behave in the crypto asset you want to follow.
Here are some classic timeframes you can use:
- Fast averages: 7, 9 and 21 and 34 timeframes.
- Slow averages: 72, 100, 200 timeframes.
What happens when the market is consolidated?
The traditional use of moving averages, when it comes to taking advantage of trades, is through upward and downward trends.
In principle, you can take advantage of the market in consolidations, but try to look for other means to operate.
In the case of the average, you will notice that when the price of a particular cryptocurrency remains within a range (without exceeding this neither the upper nor the lower limit), the price tends to pass (cross) the average several times. When this occurs without surpassing limits, be careful when using the average as a buying or selling reference.
Another indicator helps understand trading in consolidations: Bollinger Bands
Bollinger bands are one of the technical indicators in the oscillator category. It is an indicator of volatility. Thanks to Bollinger Bands, we are able to identify what the average volatility of the market is, which, a cryptocurrency market, is never lacking. Moreover, Bollinger Bands help traders understand how they should act in consolidation.
As we saw in the previous topic, consolidation is when the price of an asset is within a certain range. Thus, upper and lower limits are not surpassed. But how do Bollinger Bands help in this regard?
Even in a consolidation, the highs and lows of an asset’s price are irregular. So, one thing is certain; it makes no sense to buy at a high point or sell at a low point, if buying at the bottom of the consolidation and selling at the top of the consolidation is what’s intended.
But what is the entry point? Bollinger Bands help traders understand this as well. When the market overcomes a consolidation and does not follow along the movement, it then tends to come back. When these “false breaks” occur there is usually an overestimation of the band. In practice, the sum between the consolidated market and the Bollinger Bands shows that there is a higher probability of the market returning to its original point and that the extremes are good for buying and selling.
Thus, it is possible to identify the upper parts of the chart in which the upper band has been broken, and when you notice that the movement has lost strength, that’s when it’s time to trade against it.
The IFR is another technical indicator widely used by traders. Its ease of interpretation leads to a quick analysis of the market context. Similar to Bollinger Bands, the IFR is also an oscillator. This means that it’s used to identify market volatility.
However, there is something particular about the IFR. In times of bullish or bearish trends, it presents great opportunities for the trader.
When a cryptocurrency is bullish, the tendency is for the price to increase, thus increasing gains and losses. It has been stated that the trader should avoid buying at high points and selling at low points. But the IFR further confirms this statement by showing when the movement is stretched, even within a trend.
It is understood that if the IFR is below 30, the market is overbought. If it is above 70, it is oversold. So, if there’s an upswing and you are in doubt whether or not it’s time to buy, follow the IFR! It shows if the movement at that precise moment has come to a halt.
So, if the movement has effectively come to a halt, the right thing to do is to wait for the IFR to identify a return of the price to levels below 70 in an uptrend before buying.
The indicators make you understand the market trends. Another highly relevant indicator is volume.
Volume is one of the fundamental technical indicators for the analysis of any market. This indicator shows the interest of participants. If there’s interest, there’s trading, and if there’s trading, there’s certainly a possibility of having strong movements in a particular cryptocurrency. With low volume, it is difficult to interpret the movement of a certain cryptocurrency, because it’s liquidity that brings security to transactions.
In the case of volume, there are a few ways to use it to one’s advantage. It’s always important to interpret the market context before trading, and when the market lies within consolidation regions, the exit from consolidation usually comes along due to a strong movement in volume.
Understanding the Influence of Volume
Why does this occur? Let’s take an example of an upward trend. When there’s a break of consolidation to start a trend upwards, the behavior of the players is as follows: those who want to buy believe that this momentum is important, it’s the initial momentum of the trend. On the other hand, those who want to sell must hold back this “impetus” from the buyers.
It’s the fight of the bull against the bear market. If in this case the bulls win and the market goes up, the tendency is that the bears start to hold. In this case, volume increases. It’s precisely at this point that you must understand the dynamics of the market.
While buyers want to continue buying, understanding that there is a bullish opportunity there, sellers need to exit their positions. That is, sellers need to buy. This “pushes” the price of a cryptocurrency up.
So always analyze volume when trading! Whenever you notice the start of a movement, volume is a confirmation that there are actually participants interested in buying or selling at that price. If there is no volume, the movement tends to be weaker.
One of the great advantages of professional trading platforms in cryptocurrency is that there are indicators that were usually not found in these markets.
One such indicator is accumulated aggression. Aggression accumulation allows the balance of aggression between buyers and sellers to be tracked. If the balance is positive, this means that buyers are winning the fight against sellers. If the balance is negative, the sellers are winning the fight.
The great point of accumulating aggression is to understand that it is in fact aggression that drives the market: purchases at higher and higher prices push a cryptocurrency higher. Sales at lower and lower prices push cryptocurrency downward.
So if the accumulated balance is increasing, it means that, comparing the two sides, the tendency is for the market to go up. In other words: the buyer’s aggression is greater than that of the seller.
This indicator is an excellent trend validator as well. Follow it and see if the aggression has followed the price movement. This way you can also look for longer targets in trading.
Remember that no indicator ever has the final say. Technical indicators serve only to interpret and assist the trader in his market decisions. Study and see which of these indicators make more sense to be in your operation.
Keep following our blog and read some more about the main charts used by cryptocurrency traders! And remember: all the tools listed above are available in Vector Pro!
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