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Good crypto traders use various types of indicators to keep a track of past price movements and patterns and to predict future trends and patterns.
Learning how to use indicators in crypto trading can boost the growth of a trader and help them become more efficient. Some of the indicators used by traders are complex while others are much simpler.
In this article, we will take a look at the five best free crypto indicators for beginners that can be quite useful for them.
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What are Indicators?
As the term ‘indicators’ suggests, they indicate how the crypto market is going to move. The purpose of using indicators is to identify good trading opportunities. They can also be used to map out the price behavior patterns of a digital asset. Once these details are identified, traders devise and use various strategies to take advantage of the patterns detected.
Some of the best indicators new traders should know about are mentioned and explained below.
One of the most popular types of technical analysis indicators is the Bollinger Bands. This indicator was created by John Bollinger in the 1980s. These bands are essentially used to keep a track of or measure the crypto market volatility.
This indicator includes three bands, the upper, middle and lower bands, as seen in the image below.
The Bollinger Bands are basically used to differentiate between the high and low extremes in the crypto market. The two outer bands move away from the middle one when the market volatility is high. On the other hand, when the volatility is low, both the outer bands contract and move closer to the middle one.
If the price of a digital currency is noted to move past the upper and lower bands then a price reversal is highly likely.
The interpretation of the bands can be as follows:
- Upper band – Simple Moving Average over 20 days (SMA) + (Standard deviation of price over 20 days x 2)
- Middle band – SMA over 20 days
- Lower band – SMA over 20 days – (Standard deviation of price over 20 days x 2)
MACD stands for Moving Average Convergence/Divergence. It is one of the most popular indicators in crypto trading, as it is easy to use and provides solid signals for trading digital assets.
This major indicator follows the trends in the crypto market. MACD evaluates whether a short-term price momentum is following the long-term momentum or not. If this fails to occur, MACD is used to assess the possibility of a trend change.
The MACD formula used to assess the trend-following momentum is as follows:
26 period EMA (Exponential Moving Average) – 12 period EMA (at closing prices)
This widely used crypto trading indicator has four elements that are:
- MACD line
- Signal line
- Zero line
Here is an image that shows the elements clearly.
Traders can identify several trading signals when the signal line is combined with the MACD line and they converge, diverge or cross.
The common trading signals that are created with the help of MACD are bullish and bearish.
- A bullish signal is when the MACD line is above the signal line. This is an indication of a good time to buy.
- A bearish signal is when the MACD line is below the signal line and indicates a good time to sell.
The MYC trading indicator is slightly different from the rest as it merges momentum oscillators with trend analysis. This combination allows the MYC indicator to accurately predict when a digital asset will enter a bearish or bullish trend.
Anyone looking to understand how to use this indicator should know that trendline plays a major part. A trendline displays the possibility of a long signal when the price surges and that of a short signal if the price declines.
Another difference between MYC and other indicators is that it not only suggests when a trader should exit the trade but also highlights the potential entry point.
OBV stands for On-balance Volume and is yet another popular technical analysis indicator. This indicator makes use of a crypto asset’s volume flow to determine:
- Any changes in price in the future
- Any strong signals that indicate a good time to buy or sell a digital currency
In other words, if there is a higher high then there is also a positive volume pressure. This is in the absence of a resistance zone and it can indicate that the price of the asset is likely to surge.
If there is a lower high, in the absence of a support zone then it indicates a negative volume pressure. This means that the price of an asset is likely to fall.
OBV is used as a cumulative indicator, which means the following things:
- If the price of a digital asset closes up then the volume for that day is added to the OBV’s total.
- There are no calculations if there are no changes in the asset’s price.
- If the price of a cryptocurrency closes down, the volume for that day is excluded from OBV’s total.
RSI stands for Relative Strength Index and was developed by Welles Wilder (technical analyst). This indicator is used to highlight the weakness or strength of a digital asset, which may occur as a result of recent ups and downs in its price. This information can be used to assess if a cryptocurrency has been oversold or overbought.
The formula used to calculate the RSI is slightly complicated and is as follows:
RSI = 100 – 100 / (1 + RS)
Here, RS is the average of periods that close up in price / Average of periods that go down in price. The number of periods typically used is 14 but it can also depend on how many the trader wants to use.
The value generally ranges from 0 to 100. If the value is under 30 it indicates the asset has been oversold and if the value is over 70, the asset has been overbought.
The RSI is one of the best tools to identify trading entry points and trade when the crypto market is volatile.
Here is an image of what the RSI indicator looks like.
Understanding how to use indicators in crypto trading also requires the interested parties to know what the popular indicators are. While some are far more complex for new traders, others are simpler more suitable. Knowing the information mentioned above can help traders in forming a trading plan and may increase their chances of having a successful trading experience.
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The post How to Use Indicators in Crypto Trading – Top 5 Indicators for Beginners appeared first on Bitcoinsensus.
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.