These are 2 key price indicators that every cryptocurrency trader should know

Technical analysis is the study of chart patterns and is a tool that can help traders improve their advantages in other areas.

This is done by keeping the trader on the right side of the trend and providing a warning when the trend is about to reverse. There are many indicators and patterns to accomplish this task, but there is no specific indicator that fits all market conditions.

Therefore, traders tend to use a combination of indicators, which is very useful in trending markets and range-moving markets. However, this does not mean that traders should mess up all charts with all available indicators. In some cases, using too many indicators will only hinder the decision-making process and cause confusion, but will not help traders.

As traders develop their chart reading skills, they tend to reduce the number of indicators and use indicators that are more suitable for their trading style. Similarly, there is no perfect set of indicators that can provide better results than other indicators, it is just a matter of preference and practice.

In this article, the set of indicators that will be discussed are moving averages and relative strength indexes. Without going into the technicalities of each indicator, we will focus on the basic methods for effectively using them. The methods discussed here are by no means complete, there are countless other possibilities, and traders can use the method that best suits them. This explanation can be used as a guide to further improve analytical skills.

Moving average

Moving averages are trend-following or lagging indicators because they provide delayed feedback after the price movement has occurred. The most popular time frames for trading and investing are 20, 50 and 200 period moving averages. Short-term traders also use 5 and 10 moving averages, but they tend to whip and may not be suitable for everyone.

Moving averages are divided into four types: simple, exponential, smoothed and weighted, but the most popular are simple and exponential moving averages.

For calculation purposes, exponential moving averages give more weight to recent price data, so they tend to respond quickly to price changes. On the other hand, simple moving averages have the same weight on price data, so they tend to be slower in responding to price changes.

Therefore, traders tend to use EMAs in shorter timeframes, such as 10 and 20, because they capture changes quickly, while for longer timeframes, they use simple moving averages because the trend is usually not fast. change direction. For the current example, a 20-day EMA and a 50-day SMA will be used.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a momentum indicator that captures price changes and acts as an oscillator in the range of 0 to 100.

Generally, readings below 30 are called oversold, and readings above 70 are considered overbought. Although these boundaries work well in range-bound markets, they tend to send false signals during the trend phase.

The most popular time frame is the 14-period RSI. However, this is not set in stone, because short-term traders can use 5 or 7-period RSI, while long-term investors can choose 21 or even 30-period RSI.

One of the most popular uses of RSI is to detect divergence and warn traders of possible trend reversals. After understanding the basics, let’s look at some methods of using indicators for analysis.

The first thing a trader should learn is to spot trends. Trading in the direction of the trend is beneficial because established trends provide some profitable transactions. Let’s understand this through some crypto price actions.

Examples of range trading markets

BTC/USDT daily chart. source: Transaction view

In a range-bound market, moving averages cross each other and will not fluctuate up and down over a long period of time. Please refer to the area enclosed by the ellipse in the chart above, where Bitcoin (Bitcoin) Is still in the range, and the moving average tends to be flat. Such markets often lack direction and are difficult to predict and trade.

DOT/USDT daily chart. source: Transaction view

As shown in the figure above, Polkadot’s (point) When the price stays within a certain range, the moving average tends to be flat without any sense of direction. When prices are mainly contained between the two borders, the market is considered to be range-bound.

Next, let’s try to discover a trending market, because this is where the most profitable trading opportunities appear.

Determine the upward trend

BTC/USDT daily chart. source: Transaction view

Bitcoin was at a standstill for most of the time frame from August 1, 2020 to October 20, 2020. During this period, the moving average is flat, without any direction.

However, on October 21, 2020, the price broke this range and the RSI also jumped into the overbought zone. During the beginning of a new trend, RSI is usually still overbought at the initial stage of the trend, and the same situation can be seen here.

As prices rise, the 20-day moving average begins to rise first, and then the 50-day moving average. When the trend starts, it usually stays in effect for a long time. Let’s look at another example of trends.

DOT/USDT daily chart. source: Transaction view

In the interval from September 6, 2020 to December 27, 2020, DOT broke this interval on December 28, 2020. The RSI also rose to an overbought level above 70, and the moving average began to tilt. Again, please note how the 20-day EMA is rising rapidly, while the 50-day SMA takes time to catch up.

Under the above circumstances, RSI did not remain overbought for a long time, but remained above 50, which shows that a rule does not apply anywhere.

Identify downward trends

Unlike an uptrend that takes a while to form and stay for a long time, a downtrend is drastic and can extend for a long time like the crypto bear market in 2018, or it can quickly reverse its direction after a sharp decline.

BTC/USDT daily chart. source: Transaction view

There are two points in the above chart that need to be paid attention to by traders. First, even if prices continue to rise, RSI has been at a lower top since the end of February. This is a classic sign that the trend may be reversed. Again, this is not foolproof, but if traders combine signals with price action, the probability of avoiding disaster is high.

When the moving average completes a bearish crossover, the negative divergence of the RSI becomes more and more important. The position of the 20-day moving average that has remained above the 50-day moving average for the past few months fell below the 50-day moving average. This indicates that short-term price movements are weakening and the trend may be reversed.

After staying in the range for a few days, Bitcoin crashed on May 12 and the moving average began to fall. This, as well as the RSI being in the negative zone, signal to traders that the trend is reversing. As long as the price stays below the moving average and the 20-day and 50-day moving averages continue to decline, the trend will remain bearish.

DOT/USDT daily chart. source: Transaction view

In the above chart, we can see that after the uptrend, the DOT is stuck in a range, and the moving averages tend to be flat and crisscross each other. It is difficult to call it the highest price because the price may fluctuate. However, if traders also pay attention to the RSI, it will have a negative divergence, warning of a possible reversal.

The sharp drop on May 19 confirmed the downtrend, as both moving averages started to fall and the RSI was in the negative zone.

Remember, no signal is absolute!

For most novices, moving averages and RSI are essentially the starting point for identifying trends.

Investors should concentrate on trading and identify major trends, as this may protect them from market shocks and burn. In subsequent articles, entry and exit strategies using indicators will be discussed.

The views and opinions expressed here are only those of the author and do not necessarily reflect the views of Every investment and trading action involves risk, so you should conduct your own research when making a decision.