Trading

5 Leading Technical Indicators for Crypto Trading

By Single Broker Academy

A technical indicator is a tool used to predict the price direction of an asset, including cryptocurrencies. Technical indicators are mostly used for intraday and swing trading. Still, they can be implemented to predict long-term rate movements. 

There are easier indicators for beginner traders and more complicated ones for professionals. In this tutorial, we will have a look at standard technical tools that can be used both by newbies and crypto experts as they provide the most reliable signals.

MACD

MACD is a well-known indicator that traders apply to different assets and timeframes. MACD stands for Moving Average Convergence Divergence. It consists of a histogram and two lines - MACD and signal. The histogram is calculated by subtracting long Exponential MA from the short one. Divergence is a situation where MAs move far from each other. In this case, the histogram goes up. Convergence happens when the distance between MAs reduces; thus, the histogram moves down.

MACD: Signals 

MACD is applied to find momentum in the asset's price and catch buy and sell signals.

Convergence / Divergence

Convergence/divergence is a common signal for oscillators. Convergence and divergence reflect the difference in the direction of the price and the indicator. A bullish convergence (buy signal) is a market condition when the price falls, but the indicator's histogram forms higher lows. A bearish divergence (sell signal) appears when the price goes up and the MACD declines (1 in the picture below). 

Crossovers

There are two situations when the crossover provides signals for traders - zero line and lines crossovers. A zero line crossover provides a buy signal if the histogram breaks above the 0 level from bottom to top. A decline in the cryptocurrency's price is anticipated when the histogram breaks below the 0 level (3 in the picture below).

A line crossover includes an interaction between the signal and MACD lines. If the MACD line crosses the signal one bottom-up, it's a sign you can buy the cryptocurrency. An opportunity to sell occurs when the MACD line breaks below the signal line (2 in the picture below). The crossover signal is more reliable in a solid trend. In times of high volatility, which is common for the crypto market, the crossover might provide false alerts. 

Overbought / Oversold areas

MACD's overbought and oversold signals aren't as clear as those of other oscillators as the MACD doesn't have certain levels except for the 0 line. Traders can define the levels themselves. If the histogram and signal lines form higher peaks, a trader should consider selling the cryptocurrency as the market is overbought. If the MACD lows move down, there are odds of an upcoming upward correction.

Single Broker Academy - 5 Leading Technical Indicators for Crypto Trading - MACD

Tip for Using MACD Effectively

MACD's default settings are 12, 26, 9. They are the most effective for most trading strategies, but not all. You can also use 8, 17, 9 parameters. For an intraday trading strategy, you can apply the 3, 10, 16 set. A 5, 35, 5 combination is mostly used for shorter timeframes as they are more sensitive to price volatility. As the cryptocurrency market is volatile, sensitive settings may provide a large number of false signals. Experienced traders can create their own strategies by testing various parameters.

Ichimoku Kinko Hyo

Ichimoku Kinko Hyo or Ichimoku consists of five lines - the tenkan-sen, kijun-sen, senkou span A, senkou span B, and chikou span.

Ichimoku: Signals

Ichimoku provides a wide range of signals that will help to determine the trend, gauge momentum, and place support and resistance levels.

Senkou Span: The Senkou Span cloud consists of A and B lines. It's a key element of this technical tool. 

Kijun-sen, or a base line, is used to define future price movements. If the asset is above it, there is a chance of a prolonged price increase. When the price is below the base line, it's more likely the fall will continue (4 (brown line) in the picture below). 

Tenkan-sen, or a conversion line, provides short-term signals. When moving up, the line signals an uptrend. When the tenkan-sen goes down, the market should expect a short-term downtrend (5 (blue line) in the picture below). A sign of consolidation occurs when the line moves horizontally. Also, the conversion line offers short-term buy and sell signals. If the asset is above the line, it's time to buy. When candlesticks move below the tenkan-sen, it's time to sell. 

Chikou Span provides buy and sell signals. A rise of the line above the price offers investors an opportunity to buy a cryptocurrency. If the line falls below the price, it's worth considering a sell position.

Single Broker Academy - 5 Leading Technical Indicators for Crypto Trading - Ichimoku

Tips for Using Ichimoku Effectively

Ichimoku is one of the most reliable trading tools. However, it has pitfalls you should know about. Firstly, the signals can be delayed. Secondly, as with any other indicator, Ichimoku may provide false signals, but their number is lower. 

Relative Strength Index

The Relative Strength Index is one of the simplest trading tools. It consists of a line that moves within a range. The key range levels are 30 and 70. All the signals mentioned below will be built around them. 

RSI: Signals

Overbought / Oversold Conditions 

The 30 level is the border of the oversold area; the 70 level is a threshold of the overbought area. If the indicator breaks below the 30 level, it means the cryptocurrency is oversold, and investors should expect an upcoming rise. When the index reaches the area above the 70 level, it's a sign the crypto asset is overbought, and a correction could happen soon (1 in the picture below). 

However, the signals appear only when the index leaves these areas. The RSI can be in the oversold/overbought zone for a long period. Thus, it's not recommended to open trades until the index crosses borders back.

As the crypto market is highly volatile, there are risks the index will return to overbought/oversold market conditions quickly. Thus, it's vital to get confirmation from other indicators or chart patterns. For instance, investors can use the MACD indicator we mentioned above.

Divergence

As with most oscillators, the RSI provides a divergence signal. A price divergence is a more reliable reversal signal than 30/70 levels. If a new high of the RSI doesn't follow a new top of the price chart, it's a bearish divergence. There is a chance the price will decline soon. At the same time, when the price's minimums move down but the indicator forms higher lows, it's a bullish divergence. So, the cryptocurrency is expected to increase in value.

Single Broker Academy - 5 Leading Technical Indicators for Crypto Trading - RSI

Tips for Using RSI Effectively

Although standard 30 and 70 levels work for most trading strategies, you can also use 20 and 80 levels. They may be more suitable for the crypto market as cryptocurrencies are highly volatile. A wider gap between the indicator's levels reduces the number of signals but allows filtering fake ones. 

Also, the indicator has only one setting you should think about; it's a period (the number of the previous bars the indicator counts). The standard parameter is 14. Still, you can change it depending on your trading strategy.

Other common settings are 9 and 25. The shorter the period, the more sensitive the indicator. A short period works better on small timeframes catching minor price fluctuations. At the same time, you should remember that cryptocurrencies suffer significant price fluctuations. So, the sensitive indicator may provide more fake signals.

Moving Average

Moving Average is a popular indicator known by any trader. It's the first trading tool a beginner investor discovers. There are several types of Moving Averages: Simple, Exponential, Linear Weighted, and Smoothed. 

The Simple Moving Average (SMA) is the most usable type of MA. It's applied to many trading strategies. Exponential (EMA) and Linear Weighted lines can be combined as they resemble the rate movements more accurately than other types. Also, their signals occur more rapidly than those of other MA variations. Smoothed MA isn't good for highly volatile markets. Still, if the crypto market trend is solid, this MA is useful as it smooths price fluctuations.

Moving Average: Signals

Trend

MA is a trend indicator. Thus, the trend signal is leading. There are two MAs conditions:

Golden Cross occurs when the Moving Average with a shorter period breaks above the MA with a longer period, signaling an upcoming uptrend.

Death Cross is the opposite situation, when the MA with a lower period crosses the MA with a higher period upside-down. It's a sign of an upcoming downtrend (1 in the picture below). 

A single MA can also be used to determine the trend direction. It's believed that when the MA rises, it's a bullish signal. In the case of the bearish trend, the MA declines. However, it's logical as the MA is a gap indicator. It means that the signals are formed with a delay as the indicator is calculated on the previous price data.  

Support and Resistance 

Moving Averages are widely used as support and resistance levels (2 in the picture below). The strength of the levels depends on the MA's period. MAs with a higher period provide more reliable signals. 

Considering the strength of support and resistance levels, it's worth thinking about the timeframe. The higher timeframe is, the stronger the MA will be.

Single Broker Academy - 5 Leading Technical Indicators for Crypto Trading - MA
Tips for Using Moving Averages Effectively

A single MA seldom provides signals. MAs of the same type but with different periods should be combined. There are well-known sets of MAs, for instance, 9-12-26 and 50-100-200.

Moving Averages with smaller periods provide a bigger number of signals, but the risk of fake ones increases. They are mostly applied on lower timeframes (before and including H1). MAs with greater periods offer fewer signals, but they are more reliable. Such MAs are useful on large timeframes (after H1). 

The MA settings include not only a period but a price and shift. The close price is recommended. However, some strategies may include other price settings. The shift moves the Moving Average back or forth. Still, the shift is not a crucial parameter; it seldom changes.

Fibonacci Retracement

Fibonacci indicator includes 0.0%, 23.6%, 38.2%, 50%, 61.8%, 100% levels. They serve as support and resistance levels. Moving closer to these levels, the price is expected to consolidate and reverse. Thus, you can use Fibo levels as entry/exit points. 

Fibonacci Retracement: Signals

Single Broker Academy - 5 Leading Technical Indicators for Crypto Trading - FibonacciTips for Using Fibonacci Levels Effectively 

All the indicators mentioned above are easily implemented on the price chart. It's not a case of the Fibo levels. To add the indicator to the chart, you need to find the beginning of the previous trend and draw the line from its top to bottom. 

The Fibo levels don't require specific settings. At the same time, you can add more levels if required. The Fibonacci tool is effective on various timeframes.

Do the Indicators Really Work? 

As we mentioned in the introduction, technical indicators are mostly used for short- and medium-term trades. They are not effective if you plan to invest in a cryptocurrency for more than several months. In this case, you should combine technical and fundamental analysis. However, if your trading strategy is aimed at short- or medium-term profits, these technical indicators are the best.