4 Major Technical Indicators in Trading Cryptocurrencies: How to Use Them

Trading cryptocurrencies can be exciting. Imagine the dopamine rush you feel when you hit your profit target or the scream of a coin when a coin you invested in skyrockets to 100x. Yes! You can say that there are only a few things in life that come close to feeling that way. However, the same way there are wins, is the same way that losses abound.

And, if you have been trading for a while, you will agree that it is not always green on the other side. But how can you cut short the losses waiting on any opportunity to send your and your trading capital to the ground? Well, there are many ways. Some would say you need to understand risk management— that’s valid! Others would point to the necessity of trading psychology— that should also not be ignored.

However, the most important of them all has to be education especially if you stare at the charts consistently. What do we mean by this? It is saying that understanding basic chart interpretations and movements is extremely crucial if you intend to succeed with cryptocurrency trading. Therefore, we will examine several indicators that could play a big part in trading and explain how you can use them to your advantage. Nonetheless, please note that these indicators sometimes work hand in hand. So, one telling you that the next direction is an uptrend is no guarantee for success. But first, let's define what technical indicators entail.

Technical Indicators

In simple terms, technical indicators are tools used to measure the past, current and future market trends of assets. We can also say that it helps to understand the market condition, whether bull or bear: and it can also be vital in identifying the momentum at which an asset is moving.

So, whatever kind of trading you are involved in, in the crypto market, technical analysis can help you out. It does not market if it’s spot, futures or options trading, indicators are built for all kinds. Now that you know the aim of these indicators, let’s jump right into explaining four of them and how you can use them.

Relative Strength Index (RSI)

The Relative Strength Index is a technical indicator that helps to assess the momentum of an asset. It can also help with giving signals of when to buy an asset or when to sell. The “strength” in the name gives reasons iit is important in determining the weakness or solid state of a cryptocurrency. We will explain this in more practical terms.

First, know that the RSI ranges from zero to 100. But there are significant levels which give an evaluation of the happening with cryptocurrencies.The two notable values are 30 and 70. When the RSI is at 30, it indicates an oversold zone. That means a lot of investors have sold the asset in an interval but the asset has a chance to reverse its price and follow an uptrend.

It is a similar case with the overbought level of 70. In this instance, it means that investors have bought a cryptocurrency with immense pressure and have most likely made profit from it. So, the next thing could be for the cryptocurrency to follow a bearish momentum as investors would sell for gains.

Bollinger Bands (BB)

As you probably know, the crypto market is a highly volatile one as BitiCodes clearly states.. So, there should be an indicator that measures this volatility. This is where the Bollinger Bands, popularly called the BB, comes in. Let’s briefly let you know that the indicator was created by John Bollinger, a well-known technical analyst.

So, how does the Bollinger Bands contribute to your trading journey? First, it is always in your best interest to know if a crypto is volatile at the moment or not and the BB can help you with that. Extreme volatility shows possible price action in unpredictable directions while contractions in the BB points to consolidations.

There are also other signals that the bands show. For example, if a crypto price continuously touches the upper band, that shows an overbought signal. On the other hand, if the price touches the lower bands repeatedly, then that’s an oversold point.

The Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (MACD) is also similar to the RSI in a way. This is because it also assesses the momentum of a cryptocurrency. However, there are some differences between them.

Like the RSI, it is a great buying and selling indicator. But the MACD employs the services of other indicators to display its signal. The most notable one is the Simple Moving Average (SMA). It specifically uses the difference between the 12-period and 26-period SMA to show the momentum of a cryptocurrency.

So, here is how it works. There are two dynamic lines (blue and orange) with the MACD, and there is also an histogram. In interpreting the stance, you need to consider both lines and the histogram. If the lines are below the histogram, then sellers are in control. But if the lines are above the histogram, then buyers have control. Regarding the lines, if the blue surprised the orange, then it could be a buying signal but if the orange maintains its position over the blue, then the signal could be to sell.

You should, however, note that one indicator alone is not sufficient to determine the momentum or direction of a cryptocurrency. All of them work hand-in-hand. So you would need to grasp an idea of the major ones if you aim to excel with trading.

Directional Movement Index (DMI)

The Directional Movement Index (DMI) is one that is different from the rest in the sense that it does not necessarily measure momentum. Instead, it focuses on the possible direction of a cryptocurrency, and we will tell you how you can read it.

With the DMI, there are three dynamic lines— blue, red and yellow. While the blue represents the buyers’ strength, the red signifies the authority of sellers. So, in reading the DMI, you need to look at both. When the blue is above the red, buyers have an edge and the price of a crypto could go higher. However, when it is the opposite, sellers have edge and a crypto price could fall.

Then, the last one (yellow) is called the Average Directional Index (ADX). What this does is that it shows the strength of a particular direction. So, let’s assume that the blue line is over the red line and the ADX trends higher than a value of 25. That is a strong directional movement. But in a case where the ADX is lower than 25, then the directional movement is considered weak.

Final Thoughts

Finally, we have reached the end of this article. Hopefully, you have learnt a number of things to help you in your trading journey. However, do not explain these indicators as a guarantee for making profits.

Like it’s stated above, technical indicators depend on one another. In most cases, the trend of an indicator is not enough to determine a cryptocurrency’s momentum or direction. So, ensure that you practise, and learn more to improve your trading skills without losing a bunch of your capital. Price movements can sometimes be delicate, and in some cases other cryptocurrencies depend on the Bitcoin movement. So, you would need to combine fundamental analysis and the use of indicators if you aim to get ahead in the trading game.