When most people first venture into the crypto market, they tend to make a lot of mistakes (Been there, done that) because trading decisions are more often than not backed by gut, intuition and speculation rather than being informed by the facts.
Now some people might argue that fundamental analysis does not work in cryptocurrencies, but factors like demand, supply and major events taking place in the crypto community can be taken into consideration. It might differ from the traditional fundamental analysis of stocks using profits margins, EPS etc. but cryptocurrencies are not stocks and differ in nature inherently.
For today, our topic of discussion is going to be technical analysis specifically.
As far as the technical analysis is concerned, charting indicators used in stocks can be used and applied in crypto markets too because they are used to study price trends and momentum swings.
Disclaimer: Technical indicators have their share of sceptics but I have found them valuable in my trading journey. If used diligently with a well-thought trading strategy, they work most of the time.
Now that we have a brief introduction, let us dive into it and study four of the most commonly used charting indicators
1. Relative Strength Index
A momentum oscillator, RSI is your go-to tool if you want to ‘buy low and sell high’. It comes in very handy to determine whether a particular currency is overbought or oversold. Being an oscillator, the RSI should be plotted between values 0 to 100. The indicator has an upper line at 70 and a lower line at 30.
When the price shoots upwards and crosses the 70 mark, the currency is considered overbought and when the price falls below the 30 mark, it is considered to oversell. Always make sure to check the RSI indicator before entering or exiting your position in the market.
As the name suggests, moving average is an indicator, which measures the average price of a currency over a specific period. They give a smoothed out graph of the price action and are helpful for gauging the direction of the trend.
Timeframe used for moving averages varies from 20 days, 50 days, 100 days and 200.
There are different types of moving averages like the Simple moving average (SMA), exponential moving average (EMA) and weighted moving average (WMA) but that’s a topic for another day.Moving averages like the 20 days, 50 days and 100 days are often used in tandem to make better trading decisions.
To give an example, if the 20 days moving average falls below the 50 days, it suggests a change in momentum and gives us a sell entry. Other combinations of moving averages are used together for buy and sell signals.
Slow Stochastics is another oscillator like the RSI which can help you identify overbought and oversold conditions. Plotted on a range of 0 to 100, levels which are consistently near the top of the range indicate overbought conditions and those near the bottom of the range indicate oversold conditions.
The stochastic indicator can be very helpful to you in deciding when to exit and when to enter.
Another widely used indicator is the Bollinger band. The band consists of three sets of curves drawn in relation to the price. The middle band using the 20 days SMA to measure the intermediate trend and serves a base for the upper and lower band.
Smaller Bollinger bands in a sideways price movement usually signal less volatility and a probable bull run-up. When the price of the currency movies outside or inside the bands, it is considered to be overbought or oversold.
It is advisable not to rely on one charting indicator and use them in tandem before acquiring trading positions. Even though they work most of the time, nothing is guaranteed 100 perfect
Recommendation: You can either use indicators on the exchanges you are trading on or use the trading view website, which pulls out prices from various exchanges and their different markets