In this resource, we’ll describe the indicators and tools that are popular among crypto traders and investors. Note, there is no “best” indicator or tool. It all depends on the context. Often, traders will rely on multiple indicators and tools to help them make trading decisions.
These indicators and tools are used by crypto traders and investors who do technical analysis (TA). TA is a type of analysis that attempts to predict future price action based on what has happened in the past. (Learn more about TA in How to Do Technical Analysis on Cryptocurrencies.)
Chart Indicators & Tools
Moving Average (MA)
An MA is a constantly updating average price. It is calculated by taking the mean of a given number of data points and plotting it on a chart. Traders and investors will typically check in on the MA to help them track the direction and strength of a trend. There is no “right” or “wrong” MA to use. That said, common MAs are 50, 100, and 200.
Some crypto traders and investors prefer using a certain type of MA known as the exponential moving average (EMA). Compared to regular MAs, EMAs place greater weight and significance on the most recent data points.
From a crypto trader’s perspective, this can make the EMA more useful. That’s because cryptocurrency prices can often be quite volatile.
Relative Strength Index (RSI)
The RSI is a momentum indicator. It helps crypto traders and investors determine if a cryptocurrency is overbought or oversold. The RSI’s formula always returns a value of between 0 and 100.
There is no agreement among crypto traders regarding what value constitutes overbought or overbought territory. Typically, values above 85 will signal overbought conditions. If the RSI is below 15, many will take that to mean the cryptocurrency has been oversold.
Moving Average Convergence Divergence (MACD)
The MACD is what’s known as a ‘trend-following’ indicator. (Trend followers are traders and investors who trade in the direction of the current price action of the cryptocurrency. They will do this until the trend ends.)
Traders and investors often use MACD indicators to identify new trends in a market for a given cryptocurrency and confirm if it is bearish or bullish. The MACD will trigger buy and sell signals when it crosses above or below its signal line.
Bollinger Bands (BBs)
BBs help crypto traders and investors determine whether cryptocurrency prices are high or low on a relative basis. BBs comprise three lines: an upper band, a lower band, and a moving average. BBs are widely considered an oscillator measurer. (The word ‘oscillate’ is used to describe something that is moving back and forth in a regular rhythm.)
Types of Basic Trends
A trend refers to the direction that the price of a cryptocurrency is moving in based on where it has been in the past. Two terms to know when discussing trends are ‘peaks’ and ‘troughs’. Understanding peaks and troughs is important because they literally define the direction of a trend.
There are only three ways that peaks and troughs can move: up, down, or sideways. This explains the name of the three basic chart trends: uptrends, downtrends, and sideways trends. (People use ‘consolidation’ and ‘sideways trends’ interchangeably.)
- Uptrend: ascending peaks and troughs (i.e., “higher highs and higher lows”)
- Downtrend: descending peaks and troughs (i.e., “lower highs and lower lows”)
- Consolidation: prices move sideways within a horizontal range
Advanced Indicators & Tools for Crypto Traders
Time cycles help you identify patterns in price action as it relates to a given time period. It is a particularly useful tool when it comes to trading and investing in PoW-based cryptocurrencies (e.g., BTC, LTC, BCH, ZEC). That’s because these cryptocurrencies have a fixed block reward halving schedule.
Elliott Wave Principle
Elliot waves are used to analyse crypto market cycles and forecast market trends. In its most basic form, an Elliot wave cycle will consist of five waves (i.e., an impulse wave) that follow the market trend. This is followed by three waves (i.e., a corrective wave) that move against the trend.
The Fibonacci Retracement tool plots percentage retracement lines based upon the mathematical relationships within the Fibonacci sequence. (A Fibonacci sequence is a string of numbers in which each successive number is the sum of the two previous numbers (e.g., 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, and so on.)). These percentage retracements identify possible areas of support or resistance.
The TD Sequential helps you identify a price point where an uptrend or a downtrend exhausts itself and reverses. There are two stages to a TD Sequential system. The first is TD Setup, a series of at least 9 consecutive closes less than the close four trading bars earlier. And the second is TD Countdown, a series of 13 successive closes less than or equal to the low two price bars earlier.
Ichimoku is a trend identification system that’s based on moving averages (MAs). It considers more data points than a standard candlestick chart. Therefore, Ichimoku gives crypto traders and investors a clearer picture of potential price action. Distinctively, MAs are plotted using the 50% point of the highs and lows of a given candle.