A Complete Guide to Using Technical Indicators to Trade Cryptocurrencies

Technical analysis (TA) has been an important part of trading cryptocurrencies for a long time. The very first case of using candlestick patterns was recorded in Asia in the 18th century; technical analysis has been around since then.

Over time, thousands of analysts have studied many stocks, securities, commodities, native and foreign currency exchanges, & cryptocurrencies using technical analysis (TA).

A trader or a technical analyst mainly analyzes the market data (market price and volume) using a mix of technical indicators to portray future market patterns. Although you don’t always need to use indicators to trade successfully, they can certainly be helpful to support your analysis.

In this article, we will be discussing what technical indicators are and how you can use them to trade cryptocurrencies.

What are Technical Indicators?

Technical indicators or alerts are the mathematical calculations or ‘signals’ that are used in technical analysis to figure out what will happen to the price of a security, asset, commodity, stock, native and foreign currency, or cryptocurrency in the future.

The indicators or tools are there to help traders and investors determine both long and short term price direction of an asset or cryptocurrency while identifying future trading opportunities.

When it comes to indicators, it gets confusing to figure out the best one since there are many and not all of them can perform every task. This is where Awara comes in. Awara is a user-friendly crypto indicator platform that allows you to create your own customizable crypto indicator alerts.

There are mainly 4 categories of technical indicators or alerts—

Trend Indicators

Trending indicators pinpoint and follow trends over time to determine when the market is moving up, down, or sideways and then provide a trading decision based on that.

Moving averages are mostly considered trend indicators since they generate price averages for a particular period to determine a trend line. The trend lines normally reflect the prices going up and down across different candles.

But, when the average is calculated, the candles portray an upward trend (increase in price) or a downward trend (decrease in price). With this information, it also gets relatively easier to figure out when an asset will reverse or range (move sideways) in trend.

Simple Moving Averages (SMA)

A simple moving average is the summation of the recent prices of an asset divided by the total number of periods.

It can be derived by adding the closing price of a currency for several periods and then dividing the sum total by the number of periods.

Short-term averages react quickly to the changes in the price of a currency, while long-term averages take longer to react.

Exponential Moving Averages (EMA)

This indicator prioritizes the most recent data points, unlike the simple moving average that prioritizes all data points equally. It is mainly used in addition to other indicators to reflect sudden market changes and to make sure if those changes are valid.

The EMA is more suitable for traders trading intraday in fast-moving markets. The 12- and 26-day EMAs are used for short term trends while the 50- and 200-day EMAs are used for the long term.

Moving Average Convergence Divergence (MACD)

This indicator measures both trend and momentum by determining the relationship between two moving averages of an asset price.

The MACD consists of two lines — the MACD line and the signal line. If the MACD line surpasses the signal line, it means the momentum is bullish (upward trend) and it’s better to buy. Again, if the opposite happens, it means the momentum is bearish (downward) and it’s better to sell.

When the lines diverge, it shows the strength of the current trend. It means, both the price and momentum are increasing. Again, when the lines converge, it shows a trend reversal. It means although the price is increasing, the momentum is decreasing.

Many charting tools often make a histogram, which reflects the distance between both the lines. When the histogram reaches a milestone and reverses course to pierce through the zero lines, buy or sell signals go off.

Kaufman’s Adaptive Moving Average (KAMA)

The KAMA indicator is mostly based on the Exponential Moving Average (EMA). It’s responsive to the trend and volatility of the market.

It monitors the price of a currency when the noise is low. It also flattens the noise if the price fluctuates. The KAMA is mostly used to predict the trend while determining the market’s volatility.

Mean Reversion or Volatility Indicators

These types of indicators measure the volatility of the price to determine when a market is more volatile and more volume is entering it. They also determine how far the price will fluctuate before triggering a retracement.

Volatility mainly means the rate at which the price of an asset can increase or decrease. Since a volatile market has more volume, it moves the price to create more trading opportunities.

Bollinger Bands (BB)

This indicator measures the volatility of a market by reflecting a graphical chart made of three lines or bands — upper band, lower band, and an SMA middle band. Normally, the distance between the upper and lower bands from the middle band is two standard deviations.

Since the width of the chart represents the volatility of the market, the volatility changes when the distance between the bands change. If the distance increases the volatility also increases and vice versa.

Normally, the closer the price of an asset is to the upper band, the higher the chances are of that asset being overbought. Again, when the price of an asset is closer to the lower band, the chances of that asset being oversold are high.

Standard Deviation (SD)

This indicator measures the size of recent price moves of a cryptocurrency, to determine how volatile the price might be in the future. It predicts whether the volatility of the price is likely to increase or decrease by comparing the current price movement from its historical price movement.

Average True Range (ATR)

This technical indicator measures the volatility of a market and can be determined from the 14-day moving average of true range values. It has applications in all types of securities including the commodity market.

Momentum Indicators

These types of indicators measure the speed and strength of the price movement in a particular market over a certain time. They mainly reflect if the price of a cryptocurrency is trending up or down and if it’s overbought or oversold based on previous price ranges.

Relative Strength Index (RSI)

This indicator measures the speed and change of price movements to determine if a cryptocurrency is overbought or oversold.

The RSI has a scale of 0 to 100. When the score is over 70, the cryptocurrency should be considered overbought. When it is below 30, the cryptocurrency should be considered oversold.

The RSI also reflects the momentum rate at which the price is changing. If the momentum increases when price increases, the market is in an uptrend. If the momentum decreases when price increases, the market is in a downtrend.

Stochastic Oscillator (SO)

This indicator measures the difference between the closing price and the range of prices over the past 14 days. Much like the RSI, It has a scale of 0 to 100. When the score is over 80, the asset should be considered overbought. When it is below 20, the asset should be considered oversold.

Aroon Oscillator (AO)

This indicator measures both the direction of the price movement and its strength. It has a scale of –100 to 100. Any score above 0 reflects an upward momentum or positive trend (bullish), while any score below 0 reflects a downward momentum or negative trend (bearish).

The strength of the asset can also be determined by the value of the AO reading. For instance, an asset that has an AO value of 10 is significantly weaker than the asset having an AO value of 50, even though they both are in positive upward momentum.

Volume Indicators

These types of indicators usually measure the strength and direction of a trend. They tally up the trades and determine the momentum or trend of the market. Much like the volatility indicators, they also create trading opportunities.

Market Volume (MV)

This indicator measures the number of contracts traded in for a certain asset within a particular time. It also provides a very clear notion about when and where the volume will appear in the market.

On Balance Volume (OBV)

This indicator predicts the price of a cryptocurrency based on the change in the volume of its transactions. It is a cumulative indicator that comprises both positive and negative volumes. Any significant change in these volumes reflects a future change in the price of a cryptocurrency.

If the OBV increases with the volume and there is no change in price, that means the price will rise in the short term. But if the OBV decreases with the volume and there’s no change in price, that means the price will fall in the short term.

Conclusion

It’s quite natural to feel a little intimidated by the thought of using technical analysis when trading – especially when you are new to all this. It might seem, at first, as though it contains a lot of unusual jargon and advanced-sounding concepts.

But it hardly matters if you are a professional or just starting in this field, as long as you are building a proper foundation by learning the basics and practicing regularly. Once you start experimenting, even the most complex indicators will become easy to grasp.

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