There are two primary ways to approach trading in the cryptocurrency market. First, learning technical analysis means understanding chart patterns, candlestick movements, and how the crypto market behaves. Second, by using a trading indicator, which helps traders analyze market trends, identify entry and exit points, and make data-driven decisions.
But what exactly is a trading indicator?
Many traders rely on popular trading indicators like the Relative Strength Index (RSI), moving averages, and MACD to fine-tune their strategies.
While no tool is foolproof, mastering how to read and apply a trading indicator can be a game-changer in maximizing profits and minimizing losses.
So, can you actually make a profit using a trading indicator?
The answer is yes, but success depends on how well you understand and apply it within your overall trading plan.
Continue reading to discover what trading indicators are, their types, some popular indicators and why to use them and why not.
What is a Trading Indicator?
Trading indicators are basically tools that provide the current and future condition of cryptocurrency for a given time period. All the forecasts are based on mathematical calculations such as price, volume, volatility, market sentiment, and other important data.
All predictions are based on historical data, which traders see in the form of a graph. Traders can adjust this graph according to their needs.
Trading indicators can help investors make informed decisions. Traders typically utilize indicators to confirm their technical analysis. Read in depth.
Types of Trading Indicators
There are two types of indicators: economic and technical indicators. However, in the world of cryptocurrency trading, we primarily focus on technical indicators. These indicators are based on price charts and trading volume data, helping traders make short-term decisions based on historical market behavior.
Economic indicators
This type of indicator depends on data published by the government and private institutions. This indicator is less helpful because the data is unreliable and estimated based on different scenarios.
Technical indicators
A technical indicator follows a mathematical calculation and uses price and volume as references. This indicator has wide use in cryptocurrency trading. This indicator is also categorized into different types. The most commonly used indicators are shown below.
A) Momentum indicators
This type of indicator indicates which direction the price of cryptocurrency is going in a given time period. The indicator shows a trend based on overbought and oversold sentiment and tells traders at what speed the price of a cryptocurrency is changing.
It can help in identifying trends, spotting reversals, confirming signals, and setting stop-loss levels. Using momentum indicators with other types of indicators can give a more accurate signal.
Examples: relative strength index, stochastic oscillator, moving average convergence divergence.
B) Volatility indicators
The volatility indicator shows how much risk is involved in the market by assessing the level of market uncertainty and potential price movements. Volatility indicators are useful for identifying periods of high or low market volatility.
It can help in market analysis, risk management, and making trading strategies.
Examples: average true range, Bollinger bands, volatility index.
C) Volume indicators
Volume indicators are helpful in analyzing the amount (number) of cryptocurrency traded during a given period of time. It provides insights into market participation, liquidity, and the strength of price movements.
By interpreting volume patterns, traders can gain valuable insights. It believes that if volume rises, the price will also rise, and if volume falls, the price will also fall.
It can help in confirming trends, identifying reversals, confirming breakouts, and assessing market sentiment.
Examples: on-balance volume, accumulation/distribution line, chaikin money flow.
D) Support and resistance indicators
This type of indicator is not supported by pro traders, but some traders still use it for stop loss management.
Support levels represent areas where buying pressure is strong enough to prevent prices from falling further, while resistance levels indicate areas where selling pressure prevents prices from rising higher.
These levels act as barriers to price movements and play a significant role in determining the reversal area.
It can help in identifying entry and exit points, setting stop-loss levels, and confirming breakdowns.
Examples: fibonacci, moving averages, horizontal support, and resistance.
Do you know what is arbitrage trading? Find out how it is different than trading.
The Best Common Trading Indicators for Crypto
The best common trading indicators include the Moving Average (MA), Relative Strength Index (RSI), MACD (Moving Average Convergence Divergence), Bollinger Bands, Stochastic Oscillator, Fibonacci Retracement, Ichimoku Cloud, Average True Range (ATR), Parabolic SAR, and Volume Indicator. Each trading indicator plays a unique role in helping traders analyze market trends and make informed decisions.
Below you can find overview of best trading indicators.
Moving average (MA)
It is a simple line present on the chart and moves up and down as the price moves. There are four types of MA, but the most popular is the simple moving average (SMA). The wider use strategies of MA are 200 days for the long period and 20 days for the short period. Read more.
Moving Average Convergence Divergence (MACD)
It shows a change in momentum and consists of three lines. One line is a MACD signal, and the other two lines—26 period and 12 period are moving averages. The 26-period MA is the slow-moving average, while the 12-period MA is the fast-moving average. Read More.
Stochastic Oscillator
Another indicator that shows a change in momentum and tells the overbought or oversold condition. It consists of two lines, %K and %D, in which the %K line is faster than the %D line. The signal range is between 0 and 100. If the %K line exceeds 80, it is considered overbought, and if it falls below 20, it is considered oversold. Read More
Relative Strength Index (RSI)
To calculate momentum, the RSI compares the recent gains and losses over a specified period. It works exactly as a stochastic oscillator, except the signal range. In RSI, 70 is considered overbought and 30 is considered oversold.
Bollinger Bands
Created by John Bollinger. It has three lines. The middle line is a simple moving average, and the upper and lower lines are standard deviation lines. They help traders identify volatility and potential reversal points. The upper and lower lines can be seen as resistance and support prices, while the middle line can be seen as the average price. Read More.
Average True Range (ATR)
It helps traders set stop-loss and take-profit levels based on volatility. ATR calculates the average range between high and low prices over a specified period to determine how volatile the market will be.
Fibonacci Retracement
This is one of the most popular indicators to find out the support and resistance prices. Traders use these prices to identify areas where the price may reverse or continue its trend.
On-Balance Volume (OBV)
This indicator calculates volume in a given time period. It gauges the strength of price movements and identifies potential trend reversals or continuations based on volume.
Chaikin Money Flow (CMF)
This indicator can identify the buying and selling pressure in the crypto market. It analyzes the incoming and outgoing money flow of a crypto coin based on price and volume.
Parabolic SAR
Parabolic SAR is a trend-following indicator that helps traders identify reversal points in the market. When the dots are below price bars, it suggests an uptrend, and when the dots are above price bars, it indicates a downtrend.
Why Use Trading Indicators?
Why Not Use Trading Indicators?
Conclusion.
The most effective way to use a trading indicator is by combining it with broader technical analysis rather than depending on it alone. Indicators are tools, not guarantees and they work best when used as part of a well-researched strategy.
Traders should always backtest a trading indicator using historical data before applying it in live markets. Keep in mind that just because a specific indicator performs well with one cryptocurrency (like DOGE), it doesn’t mean it will give the same results with another (like ETH). Each crypto asset has its own behavior and volatility.
Most importantly, remember that a signal from any trading indicator does not guarantee a profit. Use it carefully, in combination with risk management and a clear strategy.
Note: This article is part of the “Understanding the Crypto Trading Chart” series. More articles keep coming.
