Table of Contents
What is Technical Analysis?
How to do Technical Analysis in Crypto?
Can I use Technical Analysis for Crypto Trading?
What is the best technical indicator for crypto?
- Moving Averages
- Support & Resistance Levels
- Relative Strength Index (RSI)
- Candlestick Charts
- Fibonacci Retracement
- On-Balance Volume
- Stochastic Oscillator
- Bollinger Bands
- Ichimoku Cloud
- Moving Average Convergence Divergence (MACD)
In the ever-evolving world of cryptocurrencies, understanding market trends, volatility, trading volume, and market patterns becomes crucial for investment success. Technical analysis tools and indicators emerge as reliable and proven foundations for crypto investors' investment strategies.
Technical indicators help seasoned investors plan their investment tactics and help newbie investors better understand market behaviour and navigate the crypto world effectively.
Among the most widely used technical indicators are relative strength index (RSI), Bollinger bands, moving averages and on-balance volume, among several others. This article will decode the best technical indicators for crypto trading and empower you to become an informed crypto investor. Read on to discover the top technical indicators for a thorough crypto analysis.
What is Technical Analysis?
Technical analysis uses mathematical and statistical formulas based on a particular crypto's historical price, volume data, and volatility to forecast future price trends and help investors make calculated trading decisions. Technical indicators are usually illustrated on a cryptocurrency's price charts, as overlays, or in separate panels.
In the modern crypto world, technical indicators are pivotal to market research, investment strategies, and portfolio management. Several technical indicators, such as on-balance volume, resistance and support levels, and candlestick charts, are now commonplace in everyday crypto news and analysis.
As with any projection, technical indicators yield better accuracy when combined with other indicators. Technical indicators can also be supplemented with tools like fundamental analysis.
How to do Technical Analysis in Crypto?
Technical indicators assist crypto traders, investors, and market experts in analysing price movements to make informed decisions. They provide insights into trends, momentum, the direction of price change, and volatility, helping traders anticipate market shifts.
These technical indicators can be categorised as:
- Trend Indicators: Evaluate the direction and strength of a trend by comparing current prices to a set baseline.
- Momentum Indicators: Identify the speed of price movement by comparing the current closing price to previous closes.
- Volatility Indicators: Measure the rate of price movement and deviation.
- Volume Indicators: Measure the size or magnitude of the trend by examining the volumes traded in a defined period.
Any guide to cryptocurrency trading for beginners is incomplete without each type of technical indicator. One can truly understand crypto market dynamics by employing indicators from each category.
Can I use Technical Analysis for Crypto Trading?
Most definitely. Technical analysis is one of the major drivers and influencers of crypto trading globally. It examines data, including historical prices, trading volumes, trading channels, and entry and exit points, to generate interesting patterns and inferences. Technical analysis tools are helpful in indicating the speed and direction of price change, changes in trading volume, and possible price ceilings or support levels that usher in a change in price direction, among several other insightful and engaging results.
Technical analysis tools have become so pivotal and reliable to crypto trading that crypto trading bots observe technical market indicators and analyse them over time. These trend-following bots follow market sentiments and trends to execute trades following these trends.
Technical analysis indicators and charts are easily accessible on various crypto news websites, blogs by leading experts, and India's best crypto trading platforms. Investors must leverage this rich pool of information to make informed, research-backed investment decisions.
What is the Best Technical Indicator for Crypto?
There is no single best technical indicator for cryptocurrencies. All of these technical indicators work best in tandem to improve accuracy and credibility. Let's examine some of the best technical indicators for crypto and how they combine to give investors a thorough understanding of market dynamics.
1. Moving Averages (MA)
As the name suggests, the moving average technical indicator uses the average crypto price over specific periods. This simple yet effective technical indicator is helpful in forecasting price movements, trend direction and more.
The formula for calculating moving averages involves adding data points and dividing the total by the number of data points, creating an average for the crypto asset over time.
Beyond the simple MA, technical analysts also calculate various moving average crossovers to indicate bullish and bearish trends, the golden cross and the death cross being two of the most common crossovers. A golden cross occurs when a short-term moving average, for example, a 50-day MA, crosses above a long-term moving average, such as the 200-day MA. It signals a long-term bull market and strong positive momentum. The converse is true for a death cross wherein a short-term moving average crosses below a long-term moving average, indicating a bearish trend.
Several moving averages exist, including weighted moving averages, exponential moving averages, hull moving averages, and smoothed moving averages.
2. Support & Resistance Levels
Although support and resistance levels aren't typical technical indicators, these two price levels are critical and impactful price positions that hold tremendous significance. These are two of the first two price points that traders and analysts identify before diving into more comprehensive technical indicators.
Support is the level where prices have consistently bounced back up to new highs, while resistance is the level where prices have repeatedly faced a pullback. Support and resistance levels are usually identified by drawing out a trend line.
Another way of looking at support and resistance levels is price points where supply and demand converge, which is why the asset's price direction usually changes course at these points. When demand for a cryptocurrency matches its supply, the price in a downward trend will stop falling. This price level is a support price, encouraging investors to enter long holding positions. If the support level breaks, prices will continue to drop until a new support level is found. Often, the previous support level then becomes a new resistance level.
On the other hand, prices will keep rising until supply matches demand. It starts to drop once the price goes beyond a certain point where no more supply is available. This point is called the resistance level. Occasionally, a cryptocurrency may break through this resistance level and continue climbing until it reaches a new resistance point.
https://centerpointsecurities.com
To create a support or resistance zone using a trend line, connect at least three previous price points with a straight line. This defines the support and resistance level respectively. Support and resistance levels are also useful in planning entry and exit strategies for investors.
3. Relative Strength Index (RSI)
The Relative Strength Index (RSI), developed by J. Welles Wilder, is a popular technical indicator that measures the speed of cryptocurrency price movements. RSI is a momentum-based indicator, with speed and direction of price change being the primary drivers.
The RSI of any cryptocurrency is bound between zero and 100, with 50 being a neutral reading and 70 and 30 being the default settings for piece oscillation. When the oscillator is above 70, the asset can be considered overbought. This means the current price could be higher than its fair price, suggesting an imminent price correction. On the contrary, when the oscillator is below 30, this indicates that the security is oversold. An oversold asset is usually undervalued, suggesting that a positive price reversal is in the offing.
Like other technical indicators, the RSI works best when paired with other tools. For example, if the price of a cryptocurrency asset nears a strong support level and the RSI shows a low reading, such as 20, the likelihood of a price rally shortly could be more significant than usual.
4. Candlestick Charts
Candlestick charts are fundamental tools of technical analysis that display four different price levels in a given period:
· High price
· Low price
· Opening price
· Closing price
Initially used by Japanese rice merchants in the 1700s, Candlestick charts are now one of the most common technical indicators for a broad spectrum of assets. While they are similar to bar graphs, candlestick charts are more visual in nature and use colour & shadows as price points. The beauty of candlestick charts is that the time intervals they are drawn up vary from a minute to daily and even monthly. Hence, it is helpful across the most popular types of crypto trading, including range trading, day trading and technical trading.
Each candle has two parts: the body and the wicks (or shadows). The body represents the difference between the opening and closing price of the cryptocurrency during a time period. The top wick shows the highest price reached, while the bottom wick shows the lowest price during that time.
A green-coloured candlestick is an indicator of a bullish sentiment, while a red-coloured candlestick indicates a bearish one. Understandably, a bullish candlestick has a higher closing price than its opening price, while a bearish candlestick has a higher opening price than its closing price.
Several terms are given to candlestick charts based on their patterns and trends. These include an engulfing candle, an inverted hammer candlestick, three white soldiers, and three black crows, among several others. While reading a candlestick chart can be challenging for newbie investors, reliable cheat sheets and pattern explanations can help.
5. Fibonacci Retracement
The Fibonacci retracement, introduced by Leonardo Fibonacci, is a tool for identifying potential support and resistance levels. This technical tool is widely used to aid both short-term and long-term investment strategies for market entry, stop-loss orders, target pricing, and identifying long-term market positions.
Fibonacci retracement levels connect any price points relevant to the analyst, typically a high end and a low point. Potential resistance and support levels are identified by plotting horizontal lines at key Fibonacci levels, indicating where price reversals are likely to occur. Each price level is linked to a percentage that reflects the extent of the retracement from a previous price peak. The key Fibonacci levels are 23.6%, 38.2%, 50%, 61.8%, and 100%. These levels are derived from mathematical relationships within the Fibonacci sequence. The 0.382 to 0.618 zone is called the Golden Zone, where the price often reverses.
Ideally, Fibonacci retracement is best used in conjunction with trend lines and other technical indicators to improve accuracy.
6. On-Balance Volume
Selling pressure and purchase demand for cryptos are major price determinants. On-balance volume is a technical indicator that studies buying patterns/demand and selling pressure.
The on-balance volume (OBV) helps gauge the trading activity or volume within a period. The basic premise of OBV is that volume precedes price. Unlike other traditional indicators, this valuable indicator focuses more on volume during uptrends and less on downtrends. This helps OBV better show the actual market sentiment, revealing hidden differences between price and volume that might suggest a trend reversal.
OBV is calculated by adding the volume on the days of an upward trend and subtracting the volume on downward days. A rising OBV value indicates that buying volume is higher than selling volume. Conversely, when OBV declines, it means a rise in selling sentiments and a potential price decline. This metric is a great way to predict price trends and, more importantly, trend reversals in cryptocurrencies.
7. Stochastic Oscillator
The Stochastic Oscillator is a momentum indicator that measures a cryptocurrency's closing price and price range over a set period, typically 14 days. Its main objective is to discern whether an asset is overbought or oversold.
This technical indicator is made up of two lines:
· %K Line: (Last Closing Price – Lowest Price over the said period) / (Highest Price – Lowest Price over the said period) x 100
· %D Line: This line is calculated as the simple moving average of the %K line.
Source: https://fxopen.com
The Stochastic Oscillator ranges from 0 to 100. A reading above 80 signals overbought conditions, which could cause a selling spree and a subsequent price correction. A reading below 20 indicates oversold conditions, prompting investors to buy the crypto and potentially pushing the price up. Stochastic oscillator lines are also used to infer changes in price trends. To improve accuracy, a stochastic oscillator is best used with the Moving Average technical indicator.
8. Bollinger Bands
John Bollinger developed the Bollinger Bands technical indicator to identify potential trend reversals and entry/exit points for assets in the open market. Over time, Bollinger bands have become one of the most trusted technical indicators in the crypto world.
Bollinger bands are the combination of two reliable and appreciated statistical tools: the moving average and standard deviation. These two tools provide a clearer picture of market conditions pertaining to a particular crypto: the moving average helps with trend identification, while the standard deviation bands help gauge how volatile those trends may be.
In any Bollinger band chart, the middle line is the moving average, while the two outer bands are the deviations away from the moving average. Wider outer bands indicate high volatility while converging outer bands indicate low volatility.
Source: https://scanz.com
The formula for calculating Bollinger Bands is:
- Upper band: 20-day Simple Moving Average + (20-day Standard Deviation x 2)
- Middle band: 20-day SMA
- Lower band: 20-day SMA – (20-day SD x 2)
Bollinger Bands assist cryptocurrency traders in identifying overbought and oversold conditions. The crypto is overbought when the price reaches the upper band, signalling a potential selling opportunity. Conversely, when the price touches the lower band, the asset is viewed as oversold, presenting a buying opportunity.
9. Ichimoku Cloud
The Ichimoku Cloud is a collection of several technical indicators that illustrate the support and resistance levels, momentum, and direction of price movement for the asset in question.
Developed by Goichi Hosoda in the 1960s, the Ichimoku Cloud is infamous for being a rather difficult-to-read technical chart. However, it is one of the most illustrative and informative technical indicators. It provides more data points than the candlestick chart and often delivers well-defined trading signals.
The Ichimoku Cloud includes five lines: a 9-period average, a 26-period average, the average of those two, a 52-period average, and a lagging closing price line. The cloud, formed by the difference between these lines, is crucial.
When the price is below the cloud, it depicts a downward trend, while a price above the cloud indicates an uptrend.
In an uptrend, the top of the cloud rises, while in a downtrend, the bottom of the cloud falls.
Further, the colour and thickness of the Ichimoku Cloud can provide insights into market sentiment, trend direction and strength. A narrow cloud indicates a weak trend, whereas a wide cloud indicates a strong trend. A red cloud suggests a bearish trend, whereas a green cloud indicates a bullish trend.
The Ichimoku cloud is best used in conjunction with other indicators, such as the relative strength index (RSI).
10. Moving Average Convergence Divergence (MACD)
MACD compares two moving averages to spot potential trend reversals. This indicator was developed in the late 1970s by Gerald Appel and mainly consists of two lines:
- The MACD line, which is the difference between the 12-day exponential moving average (EMA) subtracted from the 26-day exponential moving average
- The signal line, which is the 9-day exponential moving average of the MACD
The centre line in a MACD chart is oriented to zero, with the above two lines fluctuating around the centre line. Convergence patterns between the MACD line and the signal line indicate weakening momentum and a possible price decline, while divergence signals a pick-up in momentum and a bullish outlook.
Although MACD is a widely used technical indicator, it is not as effective as volume-based indicators in identifying overbought or oversold signals. It is based only on price points and no specific volume-based parameters.
