There are two ways to do trading: first, learn technical analysis and how the cryptocurrency market works, and second, use some trading indicators to predict the market.
But the question is: What is a trading indicator? Can traders make a profit by using it? If yes, then find out how.
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. And in cryptocurrency, we need only technical indicators.
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.
The best common 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 tell 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?
- It can assist new traders in better understanding how trading strategies work.
- Trading indicators can identify small trendlines on a short-term basis that traders cannot identify.
- Indicators generate buy or sell signals based on specific needs, helping traders identify entry and exit levels.
- Indicators allow traders to analyze historical data and backtest trading strategies before executing in the real market.
- Indicators can help identify chart and candle patterns such as doji, triangles, heads and shoulders, or flags.
- Using indicators can provide psychological support to traders.
Why not use trading indicators?
- Trading indicators create complexity in decision-making, especially when using more than one indicator.
- Using trading indicators, traders may overlook critical factors such as market sentiment and fundamental analysis, which is not good.
- When the market is volatile, it creates false signals, leading to erroneous trading decisions.
- Repainting is the biggest problem with trading indicators. Repainting is the situation when the indicator changes its signal when new data arrives.
- Beside repainting, the lagging nature of trading indicators makes it challenging to accurately predict future market movements.
- Trading indicators work on mathematical calculations, and this calculation will not work on every cryptocurrency market. Tarder will have to adjust settings according to need.
- Popular indicators are widely used by traders, leading to crowded trades and reduced effectiveness because of market congestion.
- Some trading indicators require large historical data, so if the data is limited or the coin is new, it will give a false signal.
Conclusion.
The best way to use a trading indicator is to combine it with technical analysis rather than relying solely on it.
It can be more useful if traders backtest it before using it in the real market. Also, if one indicator works with a crypto market (for example, DOGE), it does not mean it will also work with other crypto markets (for example, ETH).
Also, keep in mind that a signal does not guarantee profit, so use it carefully.
If you didn’t find your answer, write a comment, and we will reach you ASAP.
Note: This article is part of the “Understanding the Crypto Trading Chart” series. More articles keep coming.
Which is the best indicator for trading?
The best indicator for trading varies depending on trading strategies. Some popular ones include Moving Averages, Relative Strength Index (RSI), and MACD.
Do indicators work in trading?
It may or may not be because their effectiveness depends on how they are used and interpreted.
Which indicator is best for cryptocurrency trading.
For cryptocurrency trading, indicators like RSI, MACD, and Bollinger Bands are commonly used due to the volatile nature of the crypto market.
Can you trade without indicators?
Yes, it is possible to trade without using indicators. Indicators have nothing to do with trading if you know price action.
Is indicator trading profitable?
Indicator trading can be profitable if used correctly in conjunction with other analysis methods.
Is it good to trade without indicators?
Trading without indicators can be beneficial for traders who prefer a simpler approach, like price action or fundamental analysis.
What is the easiest indicator for trading?
Indicators that show market momentum (Simple moving averages, RSI, and BB) are often considered easy to understand and use for beginners.
What is the most used indicator?
Commonly used indicators include Moving Averages, RSI, MACD, and Fibonacci retracement levels.
