Anyone with experience of blockchains and cryptocurrencies will be familiar with the term “technical analysis” and “TA”. People who undertake their own technical analysis tend to amass large followings on social media, and with good reason: their expert predictions help others to make smart decisions and potentially achieve returns on their investments.
While nobody truly knows how the market will change over time, technical analysis is a fantastic way to evaluate price actions and trends on a specific cryptocurrency chart. You can leverage technical analysis to choose an effective entry or exit point for any of your positions. But what does it actually mean?
Technical Analysis Definition
In the world of cryptocurrencies, analysts undertake technical analysis to predict a coin’s future direction and action. This is based on a target coin’s historical data (volume, prices), and analysts aim to use this information to determine whether investors should buy, hold, or sell the respective cryptocurrency.
The most skilled technical analysts have managed to accumulate serious profits thanks to the expected volatility found in cryptocurrency markets today. They can leverage systems designed for technical analysis and automated trading tools depending on cryptocurrency indicators.
The majority of technical analysis strategies rely on an assumption that crypto markets move in trends (such as moving averages). Experts in technical analysis expect cryptocurrency prices to follow short, medium, and long-term trends shown to occur in cycles historically.
The cryptocurrency market can appear to behave erratically when viewed on a day-by-day basis, but cryptos do usually follow a wider trend (a bull or bear market).
Technical analysis may be confused with fundamental analysis by some, but they’re very different. The latter is based on a crypto project’s business practices, principles, finances, and team instead of the trading history alone. Investors looking to make long-term investments across months or even years may find looking at fundamental analysis more beneficial than focusing on technical analysis alone.
The Top Six Indicators for Cryptocurrency Trading and Effective Technical Analysis
Let’s explore six of the best crypto indicators for trading and technical analysis:
Moving averages
Moving averages are the most common and easiest cryptocurrency indicators. As the name implies, a moving average is a moving mean calculated from a subset of a specific cryptocurrency’s historical prices across a period of time.
There are a number of moving averages to consider when dealing with cryptocurrency indicators. These include SMA (simple moving average), WMA (weighted moving average), VMA (volume moving average), and EMA (exponential moving average). Trades utilize this set of moving averages to determine price trends and make informed decisions to mitigate risk.
Traders will use these moving averages along with other types of crypto indicators to boost their predictions’ accuracy. Moving averages make pinpointing a price trend’s direction simpler as they’re presented as a smooth, clear line across a chart.
However, VMA differs from the rest as it’s based on a coin’s trading volume rather than price.
Relative Strength Index
Relative strength index (RSI) tends to oscillate from zero to 100, and is intended to predict whether a particular crypto is oversold or overbought. If a cryptocurrency has been overbought, there’s a chance that it might fall.
Traders need to calculate the relative strength as a ratio of average gain to average loss when trying to determine the relative strength index.
Typically, a crypto’s previous 14 periods will be used to calculate its average losses and gains. Coins with RSI over 70 are considered overbought, and so the price might start to fall. With an RSI lower than 30, a coin is viewed as oversold and its price could start to increase.
Moving Average Convergence Divergence
MACD is one of the most common and reliable absolute price oscillators available, as it’s designed to predict price actions based on analysis of two exponential moving averages. These are the short-term (12 days) and long-term (26 days) along with a signal line (9 days EMA).
To make predictions, experts analyze crossover of the lines. It’s believed that relying on the three price periods contributes to a higher level of accuracy.
Stochastic Oscillator
Cryptocurrencies have resistance and support levels. When these are broken, prices tend to increase or decrease substantially. The stochastic oscillator revolves around these levels, and it ranges from zero to 100 (as with RSI).
If the stochastic oscillator exceeds 80, this is a signal of overbuying and the price usually drops. Any values falling short of 20 are a signal of overselling, leading to price increases.
Bollinger Bands
You may have heard of these. These crypto indicators are placed over the price chart to signify a cryptocurrency’s volatility, and are made up of three different lines.
One is a median line, which typically represents a 20 period exponential moving average. Another is the upper curve: a median curve plus twice the standard deviation. The other line is a lower curve, which is again a median curve but minus twice the standard deviation.
Bollinger bands contract and expand to signal a coin’s price volatility. So, when they contract, this is an indication of a stable price movement. But when they expand, the bands indicate higher volatility. Furthermore, the price making contact with the lower and upper Bollinger bands represents overselling and overbuying respectively.
Traders usually find that using Bollinger bands in combination with other cryptocurrency indicators leads to an effective, consistent trading system.
Directional Movement Index
Directional movement index (DMI) is a crypto indicator designed for identifying price trends. This runs from zero to 100 (as with the stochastic oscillator and RSI), and features three curves: the average directional index (ADX), DI+, and DI-.
The latter two (DI+ and DI-) are calculated from high, low, and close values of previous periods. The average directional index curve normalizes these values with an EMA.
The directional movement index allows you to calculate a trend’s strength and enter/exit at the best time for you. But as this is a lagging crypto indicator, it will only identify a trend after it’s already begun.
Can You Always Depend on Technical Analysis?
The majority of technical analysis techniques have been scrutinized thoroughly, and tend to perform with a high level of accuracy. But as you may already be aware, nobody can be completely accurate in their predictions of market movements every single time. The crypto market has a particularly high volatility, which makes 100 percent accuracy even more difficult to achieve.
It’s also vital to remember that technical analysis can only be as effective as the trader involved, as some are stronger with identifying broader cryptocurrency trends than others. If you’re looking to invest in a crypto for a longer-term ROI, focusing on its fundamentals might be a better option.
While these cryptocurrency indicators are built on extensive research (covering stocks, trends, cryptos, etc.), they still rely on historical data. As a result, predictions are unlikely to always be accurate.
Traders are advised to trade with reliable stop-losses and exit at what you feel is the most appropriate time. That can be hard when emotions lead you to get caught up in the moment, but be smart and you should avoid difficulties.
