Trading Crash Course | The 6 Best Technical Analysis Indicators for Crypto Traders

[TL; DR]

The 6 best technical analysis indicators are Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), Stochastic Oscillator, Bollinger Bands, Volume and Moving average.

The RSI, MACD and stochastic oscillators are momentum indicators.

The exponential moving average provides more reliable signals than the simple moving average.

It is important to use trading volume to gauge the strength of emerging trends.

Introduction

Gate.io is one centralized exchange that has different technical analysis indicators traders can use. For example, traders can use MACD, Relative Strength Index (RSI), Moving Averages and Stochastic Oscillator.

Moving Average Convergence Divergence (MACD)

The moving average convergence/divergence (MACD) is a trend following technical analysis indicator which indicates whether or not the short term momentum is positively related to the long term momentum.

The MACD indicator does that by indicating the relationship between two moving averages. It is important to note that the MACD has four components namely the zero line, the histogram, the MACD line and the signal line. The MACD line is the difference between the 26-EMA and the 12-EMA.

Components of the MACD- Academybinance

On the other hand, the signal line is the 9 exponential moving average (EMA). The MACD histogram is a pictorial representation of the difference between the MACD line and the signal line. It is important to note that the MACD generates signals in different ways.

When the MACD line crosses above the signal line it is a bullish signal. On the contrary, if the MACD crosses below the signal line it is a bearish sign. As you note, these crossovers give traders useful signals.

The divergences between these two lines also give important signals. For instance, when the price records a higher high while the MACD line makes a lower high, it is a price reversal signal.

Read more about MACD

Relative Strength Index (RSI)

The Relative Strength Index is a trading indicator that shows the overbought and oversold market conditions of a cryptocurrency. It measures the magnitude of change of prices of an asset for a period.

The RSI values fluctuates between 0 and 100, giving indications of changes in price movements. The increase in the value indicates that the momentum of the asset is rising. On the contrary a decrease in its value shows weakening momentum.

The asset is in an overbought condition if the RSI value is 70 or more. In this case, the trader should look out for selling opportunities. If the RSI value is 20 or less, the cryptocurrency is in an oversold position. As a result, the trader should identify buying opportunities.

Overbought and oversold market conditions- Yoreoyster

The above RSI indicator shows the points where a trader can buy and sell an asset.

Read more about RSI.

Stochastic Oscillator

The Stochastic Oscillator, developed by George Lane, is a derivative of the RSI and indicates the overbought and oversold market conditions of an asset. Similarly, its values range between 0 and 100. A value between 80 and 100 indicates an overbought condition while the one which is 20 or less shows an oversold market condition.

Lines %K and %D- Academybinance

Basically, the stochastic indicator has two lines. The %K is the faster line while the %D is the slower one. These lines generate selling and buying signals when they cross each other. If the %K line crosses above the %D one, it is a buy signal. On the contrary if the %K crosses below the %D line, it is a sell signal. These signals are more effective if they take place within the extreme zones.

Divergences between the stochastic indicator and the price also give important signals. For example, if the price makes a higher high and the stochastic forms a lower high, it is a sell signal.

A sell Signal- FBS

The above chart shows a sell signal.

Read more about Stochastic Oscillator.

Bollinger Bands

The Bollinger Bands, developed by John Bollinger- a prominent financial analyst, functions as an oscillator measuring the price volatility of assets. The main role of this indicator is to show the dispersion of values of an asset over a period. The upper band shows the highest value of the asset while the lower band indicates the lowest ones.

The bands expand or contract in response to changes in the price of the asset. When volatility is increasing the bands expand. A decrease in the price volatility of the asset leads to the contraction of the bands.

When the price is closer to the upper band, the asset is in an overbought condition. Conversely, if the price is closer to the lower band the asset is in an oversold condition. The trader looks out for selling opportunities when the asset is in an overbought condition and identifies buying signals when it is in an oversold zone.

The overbought and oversold market conditions- Academybinance

As observed, the volatility is lower at point A than at point B.

Moving average

The moving average (MA) is a lagging indicator since it uses past price actions to confirm the existing trend. For that reason, traders do not use it to predict price changes. Basically, there are short term, medium term and long term MA. The short term MA has the periods of between 5 and 50 while medium ones have periods of up to 100.

The MA generates trading signals through crossovers and divergences. For example, when a short term MA crosses below a long term one, it is a sell signal. Conversely, if a short term MA crosses above the long term one, it is a buy signal. Also, if the price stays above the 200-day MA it shows that the market is bullish.

It is also important to note that we have two types of moving averages, the simple moving average (SMA) and the exponential moving average (EMA). The main difference between the two is that SMA assigns the same weight to the values while EMA gives more weights to the most recent values. However, they work in a similar way, although the signals that EMA generates are more reliable than the ones SMA produces.

Read more about EMA.

Volume

The trading volume of an asset is one of the most significant trading indicators. This is because it shows the number of buyers and sellers of a cryptocurrency within a period say 24 hours. Usually, a high trading volume indicates greater momentum of the asset.

For example, if the price of a cryptocurrency breaks above a resistance line, accompanied by a high volume it is a strong bullish signal. However, if it breaks the resistance level but is accompanied by low volume there is a weak bullish momentum.

Read more about Price Volume.

Conclusion

We have discussed the trading indicators which many traders use. However, this does not mean you need to use them all at once. What is important is to test them all and find the ones that best suit you. Gate.io has all the above technical analysis indicators. It is essential to note that you should always combine your selected trading indicators with the price action.

Author: Mashell C., Gate.io Researcher

This article represents only the views of the researcher and does not constitute any investment suggestions.

Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.