You can’t buy the dip if you don’t know where that dip is.
Every time crypto space goes through a hype cycle, a new flow of people decides to try their luck in crypto trading. In reality, trading has very little to do with luck but experience. At the same time, you don’t necessarily need to have deep expertise on the subject to begin making money.
There are a few smart things you can do right before you jump right into it. Start by establishing your basic trading rules and limits, consider automating your routine, and get your prediction game on point. Your goal is to figure out the current trend’s strength and esteem the best time for entities and exits.
That’s why profitable trading is often based on how well you use technical indicators. Although they come as a built-in functionality in all the major crypto exchanges, figuring out how to make sense out of them might come out as slightly challenging.
Technical Indicators: What Are They?
Crypto trading is all about numbers and how they interact with each other. The asset prices at any given point of time and historical data on the deals affect future prices. By analyzing these numbers, we will be able to make predictions and improve our trading skills. Realistically, a human being cannot collect and analyze this data without the help of special software. And that’s what technical indicators are for.
Technical indicators are mathematical calculations represented in the form of a chart. Although this price analysis tool is designed to improve your trading efficiency, you cannot expect impeccable accuracy. Indicators will not tell you the exact price of the asset, as they are only following the price movements. Similar to physics laws, the bigger price movements are, the harder it is for them to stop. Technical indicators will paint a clearer picture of buyers’ and sellers’ behavior and help you make informed decisions rather than act on your emotions.
Key Technical Indicators
There is no lack of technical indicators out there, but typically traders aren’t using them at once. Probably, you’ll only need just one or a few of them since most of these price analysis tools broadcast similar data. Don’t worry about being overwhelmed at the beginning. With time, you will know which indicators suit your needs better.
Moving Averages (MA)
The Moving Averages (MA) indicator comes in several types, with simple moving averages (SMA) and exponential moving averages (EMA) being the most common categories. You can choose one or another by evaluating current market conditions and estimating the profit to aim for.
In general, MA is used to track a trend’s strength and direction based on price data for a specific period.
The SMA analyzes data over a fixed period and estimates the average asset price to use in the data set. Once the new data comes in, the previous records are no longer taken into consideration.
Unlike the base price average, SMA rules out the old data as soon as the new one comes in. Let’s say you’re interested in monitoring numbers for the past week. The chart will be updated daily to show you the info for the previous week exclusively. EMA and SMA both track price fluctuations, but EMAs are focused on recent price inputs and are more responsive to unexpected changes. This makes them a helpful tool for short-term traders.
The 200-day MAs are the ones that most of the stock and crypto traders are watching. Typically, whenever we witness breaks above 200 or below 50, something significant is about to happen.
Relative Strength Index (RSI)
Relative Strength Index (RSI) demonstrates how different Bitcoin’s ‘true value is from its current price. This way, a trader can use it to make a profit until the situation on the market changes. Given the high volatility adherent to Bitcoin and the majority of other coins, this indicator is suitable for establishing entry points.
As for the RSI value, it is calculated via formula:
RSI = 100 — [100/(1+(average price increase/average price decrease))]
To estimate whether a coin is overbought or oversold, traders use 50 as a line that divides the chart into bear or bull market. This way, the RSI below 50 signifies an upward trend and vice versa. The coin is considered to be overbought if RSI rises over 70, and oversold when it falls below 30.
Bollinger Bands (BB) — picture to be edited
Another indicator popular with crypto traders is Bollinger Bands (BB). Created by John Bollinger, the indicator is focused on determining the market’s relative highs and lows, composing an upper band, lower band, and a moving average MA line. In simple terms, BB analyzes volatility level and whether an asset is oversold or overbought. The bands respond to the price movements: they expand when volatility rises and contract whenever it calms down.
Like RSI charts, the asset is considered overbought when BB reaches the top band and oversold when it reaches the bottom band. And when the price stays within the two Bollinger bangs, you can figure out the volatility level: squeezed bands mean low volatility, and expanded bands indicate high volatility level.
Apart from indicators, you’re going to be looking for charting patterns too. Patterns are used to assess the direction of the asset’s price and determine what’s false and what’s real during a break. Reading the patterns takes experience, but you’ll take your trading routine to the next level once you learn how to do it properly.
Here’s a brief introduction to the three crucial charting patterns.
Head and Shoulders
Chances are you’ve heard about head and shoulders before. It is a bearish pattern informing traders about changes in the current trend. The pattern consists of three peaks – the head being the highest, sitting on its two shoulder peaks. Also, there’s a neckline between the two peaks of the shoulders, demonstrating the key support level to watch at times of breakdown.
Whenever the prices continue to fall consistently below the neckline, it usually indicates that the pattern finished formatting and reacts against bullish trends. The pattern is best used daily or in even smaller 4-hour time framers.
Cup and Handle
This bullish trend looks like a bowl or a cup with a half-round handle that signifies the price is heading in a different direction from the current trend. Typically, the trend continues until the breakout from the bottom of the handle occurs. However, this is not one of those common patterns and should be best looked for on the daily charts.
As for the more common patterns, the double-top pattern is one of them. You can spot the double top formation when the price is testing a certain resistance level but gets rejected and trades sideways until the whole process repeats itself the second time. As a result, the prices go into recession. As a rule, the double top pattern means that the current trend is about to be reversed, and prices will keep on falling. Although this pattern is relevant for various time frames, daily and weekly charts along shorter timeframes of 4 or 8 hours work the best.
The Bottom Line
Crypto trading is neither a skill you learn overnight nor a result of good fortune. It is a complicated craft that takes a combination of skills, a set of suitable tools, and experience. As a trader, your job is to analyze the current trend and figure out the timing for entering or exiting. Using technical indicators along with charting patterns will most likely set you up for success.