In financial technical analysis, candlestick patterns have been effective over the years to predict price direction. Of course, these patterns also fail, and in this case, you can always take advantage of indicators. If you’re new to trading, you need to understand that indicators are mathematical calculations. They are very effective, as they help traders to identify the various trends and signals within the market. As a beginner, one of the best ways to start your trading journey is by trying out different indicators and understanding the one that suits your needs. It can sometimes be challenging to identify the best indicator for crypto trading.
In the rest of this post, you’ll discover the 4 best indicators for crypto trading. You can try out each of the indicators and understand the ones that suit your needs.
What are crypto trading indicators?
Before going ahead to talk about the 4 best indicators Indicators for crypto trading, here’s a quick question; what exactly are indicators?
Indicators are essential tools that traders need to achieve the best trading results. As the name suggests, indicators offer indications regarding the direction of the crypto trading market. They are effective for revealing price behavior patterns within the market. These patterns are exploited by traders with different strategies.
There are two major types of crypto trading indicators; lagging indicators and leading indicators. The lagging types are effective for revealing the environment and factors, which caused various price changes at certain points in the past. Information regarding past events is then taken advantage of by traders and compared to the present situation. Some good examples of lagging indicators are trend indicators and mean reversion indicators.
On the other hand, leading indicators primarily focus on future events. They are effective for predicting future price action within the market. Some good examples of leading indicators are momentum and relative strength indicators.
Here are the 4 best indicators for crypto trading for beginners
1. Relative strength index
As a beginner, RSI or relative strength index is arguably the best indicator for crypto trading. You need to experiment with this indicator to better understand market behaviors. RSI is a normalized oscillator that primarily helps to indicate the strength or weakness of a particular crypto asset.
The relative strength index helps to indicate when the price of an asset is being traded above its intrinsic value (i.e overbought) or under its intrinsic value(i.e oversold). Here’s the formula for RSI below:
Relative Strength Index or RSI = 100 – 100 / (1 + RS)
RS is achieved by dividing the “average value Up Close” by the “moving averages’ value Down Close” for a particular period.
The number of periods is usually 14. However, it can always be set to any number.
RSI is a bounded oscillator that’s available in the range of 1 to 100. According to J. Welles Wilder, the creator of this indicator, RSI includes 70 as a constant overbought and 30 as a constant oversold. Below 30 means the asset’s RSI is oversold. Above 70, on the other hand, means the RSI is overbought. Between 30 and 70 means the asset’s RSI is neutral.
To use the relative strength index, it’s always advisable to buy when the asset’s RSI is below 30 or oversold. You can sell when the RSI is way above 70 (overbought). Moving Average Convergence Divergence (MACD) and Moving Average Crossovers are two other indicators that complement RSI.
2. Moving Averages (MAs)
The second best indicator for crypto trading is Moving Averages. This lagging indicator provides traders with better insights into how a particular price action played out in past events. MAs are effective for identifying trend directions. Besides, this lagging indicator is also ideal for determining exits and entries.
3. Moving Average Convergence Divergence (MACD)
Moving Average Convergence Divergence (or MACD) is another best indicator for crypto trading. This trend & momentum indicator works by using two different MAs to determine the current status of a particular crypto asset.
For you to achieve the best results with this indicator, you need to follow a couple of rules. First, the general direction is “downward” if MACD is below zero and “upward” if MACD is above zero. Second, an uptrend is likely to surface as long as MACD continues to grow.
Moving Average Convergence Divergence can be calculated by subtracting 26-period EMA from the 12-period EMA. You’ll achieve a bearish trend if the value is negative or a bullish trend if MACD is positive.
4. Bollinger Bands
The Bollinger Bands indicator, which has been around for about 4 decades, is another best indicator for crypto trading. John Bollinger invented this indicator. It’s effective for technical analysts to determine both the overbought and oversold market.
The Bollinger Bands has three different curves, which help analysts to determine oversold and overbought. First, there’s the Middle Band, also known as the 20 periodic SMA. There is also an upper band and a lower band. As a trader, if the price deviates from any of these bands, you should expect a trend reversal.