If there’s one thing everyone knows about the cryptocurrency market, it’s that volatility is the order of the day. Navigating it is like sailing through the high seas and the price fluctuations come in humongous waves that threaten to sink your investment at the next trading session. Nevertheless, these wild price swings are not all random. After all, there are tons of people who consistently pocket profits through crypto trading.

Image Source: nigeriabitcoincommunity.com

This points to evidence that there is some science and logic to trading in the crypto markets. Now with the right tools, traders can forecast market direction with a reasonable degree of precision. It helps them know when to put in a buy order or to sell, or even when to ride out short-term volatility. These tools are known as market trading indicators. In this episode of CoinFalcon Learn, we take a look at some of these indicators and how they can make you a more informed crypto trader.

Trading Indicators Overview

You probably already know the basic concept of trading— buy the asset when the price is low and is expected to go up; sell the asset when the price is high and is expected to go down. But in order to do this, you need to at least have an idea of when the price of an asset is expected to go up or down, more so in a wildly volatile crypto market. That’s where crypto trading indicators come in.

In simplest terms, crypto trading indicators are mathematical calculations that carefully consider an asset’s price, volume and other key chart metrics to identify patterns and predict possible outcomes. This way, traders can better identify market signals and trends, which in turn, gives them a more in-depth understanding of an asset’s price movements, as well as when to enter or exit a trade, or hold on for the time being.

Image source: blokt.com

These indicators are a foundational aspect of technical analyses and are essentially chart-analysis tools used to predict the behaviour of the crypto markets by analyzing past price past actions and volume data, and then take timely action to profit from such predictions.

Top Crypto Trading Indicators for the Budding Crypto Investor

Before we discuss the leading market indicators in the crypto space, you should note that there is no holy grail indicator anywhere today that can guarantee a winning trade all the time. These tools only provide confirmation of a trade thesis and no indicator can give you a black and white buy or sell signal.

As such, while it’s important to understand how to utilize these vital trading tools, you shouldn’t become too over-reliant on them.

There’s so many other factors outside of historical data and chart lines that determine the market value of a crypto asset. For instance, prior to the COVID-19 pandemic, Bitcoin, Ethereum, XRP and other altcoins were on a steady rise and on course to breach new highs. Then the coronavirus came along and poof, all those gains were wiped out in a matter of days. Ideally, you want to be able to mix both your technical and fundamental analyses to have a broader view of the market.

With that out of the way, let’s look at some of the most reliable crypto trading indicators used by savvy crypto trader:

Relative Strength Index (RSI)

RSI falls under the category of Oscillators, which means it is designed to give traders an idea of developing market momentum on specific currency pairs. Oscillators have a direct relationship with price, so as the asset price rises, they move higher; when the price drops, the oscillators will move lower as well.

Relative Strength Indicator works by measuring the overall strength of a trend, moving like a pendulum within a 0 to 100 scale. The most important levels on the RSI are usually 30 and 70 since they indicate whether the market is overbought or oversold.

When the RSI touches 30, then the market is considered oversold and has likely reached its lowest price over that period and so there’s a good chance that there will be a price reversal. This signals a possible entry point, so traders buy more of the asset now since they expect the price to go higher in the near future.

The opposite is the case if the RSI touches 70 or goes above it. In this instance, the market is considered to be overbought and the price will likely go down. This points to an exit signal, so traders look to sell the traded asset since they expect the price to drop in the near future.

Snapshot showing how RSI is used to predict possible market entry and exit points | Source: fxtradingrevolution.com

Of course, in both instances, it’s best to first obtain confirmation of the RSI signal before making a move — if the market is oversold, wait until the RSI starts growing above 30 before buying, and if the market is overbought, wait for the RSI to move back below 70 before selling.

Moving Average Convergence Divergence (MACD)

This popular trading indicator is used to identify moving averages that signal a new short-term price trend, whether bullish or bearish. To use MACD, however, you first need to understand how moving averages operate and are measured on a chart. We’ve covered this aspect here.

To calculate the MACD, take the 26-day exponential moving average (EMA) of the crypto asset and subtract it from its 12-day EMA. If the 12-day EMA is above the 26 days EMA, then the MACD signal is considered to be positive and indicates rising market momentum (bullish), meaning it’s a good time to buy. On the other hand, if the longer-term (26-day) moving average is above the short term (12-day) average, then market momentum is moving downward (bearish) and you should look to sell.

How MACD works | Source: Medium

Bollinger Bands

This powerful tool falls under the Volatility Indicators category and is definitely a good item to have in your trading arsenal, given the crypto market’s legendary volatility.

Bollinger bands are fairly straightforward — three lines that move with the market price and widen or narrow as market volatility increases or decreases. These lines or bands comprise the simple moving average in the middle along with a higher and a lower band, which average the highest and lowest prices. The bands widen when the markets become more volatile and contract during less volatile periods.

Additionally, when both sides of the indicator start to move against each other (like scissors), it’s usually a signal that a breakout will likely happen soon.

Source: TradingView

Fibonacci Retracement

This trading indicator is used to identify potential price reversal levels by determining support and resistance levels. These Support/Resistance levels are vital in technical analysis since they deal with areas on a chart that form barriers to the price of the asset being pushed in a given direction.

Support is simply the price level from which the asset’s price doesn’t fall below for a given period. That means even if prices are going down, they’re not expected to fall below that support level and would instead bounce off of and go up. Resistance is the opposite and indicates the price level from which the price of the asset doesn’t go above for a given period.

Traders who spot signs that the market is about to move upwards or downwards often use Fibonacci retracement for confirmation. So let’s say you’re able to identify a support level, then you know that if prices are heading downwards, a reversal may be on the way, so you put in a buy order since you expect the price to go up.

Fibonacci retracement levels are 23.6%(shallow), 38.2%(moderate), 50% (normal) and 61.8% (golden).

Source: blockonomi.com

Trading Volume

This is a standard market tool used as a reliable indicator of the general market mood in reaction to a price change in a crypto asset. It’s pretty straightforward — if the price rises and there is a resulting rise in trading volume, then there is all-around support for the market movement. Essentially, if people are buying more of an asset even when the price is going up, then it’s a strong bullish trend and more and more people will want to join the bandwagon.

On the other hand, if there is a decrease in trading volume following a price increase, then it means that the market is against the price movement. After all, people should want to buy more when the price is low, so if they’re avoiding the asset, then that’s a red flag.

Finding Trading Indicators on CoinFalcon

CoinFalcon makes it easy to set up your indicators of choice when trading crypto on the platform. First, you’ll need to sign up and log in to your CoinFalcon account, then head on to its Advanced View. At the top left-hand corner, you’ll see a tab labelled “Indicators.” Click on it and simply select what indicator tools you’d like to display and use on the chart.

Key Things to Note Before Using These Indicators

  • Indicators are used for identifying relevant trends and market signals. They do not automatically guarantee that a trade will result in a profit.
  • It’s not always a good idea to use a single indicator as your standalone tool. Consider taking the time to find out what works for you and then create your own combination of indicators based on them. That being said, you don’t want to use too many indicators all at once, especially if you’re just starting out. Too many indicators can lead to confusion.
  • Give each indicator a test run before using it to carry out live trades and make sure to always confirm signals across different time frames.
  • Remain focused on your trading plan and suitable risk exposure even when using indicators. As stated earlier, there’s several other factors that can influence the market value of an asset.

At the end of the day, the idea is to develop your own distinctive trade style through rigorous testing of what works and what doesn’t. What works for Trader A might not work for Trader B and there’s still so many variables not accounted for, so blindly following another person’s trading style is never ideal.

Get started with crypto trading on CoinFalcon today!

CoinFalcon offers the best way to own and trade cryptocurrencies. Simply sign up for your free account to get started. We provide a number of convenient ways to buy Bitcoin, Litecoin, IOTA, Cardano, Tron and so many more crypto assets. Use your credit card to buy crypto or simply top up your CoinFalcon account through direct bank transfers and get started with as little as €5. You can also visit our resource library to learn more about how to better navigate the crypto space.