10 Technical Indicators For Advanced Crypto Trading

Technical analysis is the foundation of various crypto trading strategies, such as day trading, swing trading, and more, and the technical indicators are the parameters that help investors make trading decisions. On the contrary, fundamental analysis is more used by long-term investors, who are less sensitive to  short-term price fluctuations and believe the intrinsic value of the asset will grow over the years. With this clear distinction in mind, let’s proceed to analyze the 10 most common technical indicators for crypto trading:

1. Relative Strength Index (RSI)
2. Moving Average (MA)
3. Moving Average Convergence/Divergence (MACD)
4. Average Directional Index (ADX)
5. Bollinger Bands
6. Fibonacci Retracement
7. Stochastic Oscillator
8. On-Balance Volume (OBV)
9. Parabolic SAR
10. Ichimoku Cloud

The 10 Most Common Technical Indicators for Crypto Trading

Before analyzing the most common indicators for trading cryptocurrencies, remember to always implement sound risk management practices because investing in cryptocurrencies carries inherent risks, and it’s your responsibility to learn and have the knowledge to prevent serious losses. For example, consider allocating only a small percentage of your trading budget to each trade, limiting the possibility of losing a large amount of your total capital. 

1. Relative Strength Index (RSI)

The relative strength index is a momentum indicator used by traders and investing strategies that focus on technical analysis. It was developed in 1978 by J. Welles Wilder Jr. and displays a line graph on a scale from 0 to 100. It basically measures if an asset (crypto, stocks, bonds, etc.) is oversold or overbought. Traditionally, the common interpretation is:

• If RSI > 70, the asset is overbought: Bearish sign.
• If RSI < 30, the asset is oversold: Bullish sign.

The RSI can be very helpful to traders and automated crypto trading strategies to validate trends and trend reversals and identify buy and sell signals, however, consider that false signals happen quite often, and this indicator should be used in combination with other metrics to validate the movement. Additionally, remember that it is a lagging indicator, meaning that it’s based on past data, which can be an indicator but not predict future movements.

2. Moving Averages (MA)

Moving Averages are common indicators that help traders to visualize the average price of an asset during a period. It’s basically a single line that shows the average price of the asset, helping traders to have a clear view of the underlying trend without the noise of random price fluctuations. There are 2 main types of moving averages:

Simple Moving Average (SMA)

The SMA is the simple calculation of the arithmetic mean of the prices over a specific period, such as 10 days, 1 week, etc. The formula is quite simple, but it doesn’t provide information about the most recent data.

Exponential Moving Average (EMA)

The EMA is more suited for dynamic and volatile markets since, unlike the SMA, it gives more weight to recent prices, making it more responsive to new information and trend changes.

As you can understand, moving averages are indispensable indicators that every trader uses during fundamental analysis since they provide, in the form of lines, a clear overview of the trend over a certain period.

3. Moving Average Convergence Divergence (MACD)

The MACD is another common indicator, created in the late 1970s by Gerald Appel and used both in trend-following and momentum strategies. It is a powerful tool to help traders identify buy and sell signals since it shows the trend strength and direction. It is composed of three components:

• MACD Line: The MACD line is created by subtracting the 26-day EMA from the 12-day EMA.
• Signal Line: It is the 9-day EMA of the MACD line.
• MACD Histogram: It is the visual representation of the difference between the MACD line and the Signal line. 

• When the MACD line is above the Signal line, the histogram is positive and generates a bullish signal.
• When the MACD line is below the Signal line, the histogram is negative and consequently shows a bearish signal.

4. Average Directional Index (ADX)

The ADX is a common indicator developed in 1978 by J- Welles Wilder, and used by crypto traders to assess the strength of the trend. It’s useful because it provides valuable insights about the momentum behind the trend, and it’s a trusted guide for traders who want to trade in the direction of a strong trend, consequently reducing risks while maximizing profits.

It is a non-directional indicator, so it determines only the strength of the trend, but not the direction. Its value ranges from 0 to 100, and higher values mean stronger trends.

• 0-20: The trend is weak, and the market may consolidate before moving in a new direction.
• 20-40: Trend is beginning to gain strength.
• 40-60: Very strong trend, traders usually hodl during this phase.
• 60-100: ADX over 60 is rare, and it means an extremely strong trend.

5. Bollinger Bands

Created in the 1980s by John Bollinger, this technical indicator is one of the most popular in crypto trading since it helps identify overbought or oversold conditions. It is composed of three main components:

• Middle Band (Simple Moving Average): The middle band is a Simple Moving Average (SMA) typically set to a 20-period moving average. It acts as the baseline, providing a reference point.
• Upper Band: It is plotted two standard deviations above the middle band. This band represents a potential overbought condition.
• Lower Band: The lower band is plotted two standard deviations below the middle band. This band represents a potential oversold condition.

Bollinger Bands are used by traders to evaluate the volatility of the asset since the distance between the upper and lower bands reflects market volatility: Wide bands mean higher volatility, while narrow bands suggest lower volatility. Additionally, this indicator is the basic foundation of the principle of mean reversion since it suggests that prices tend to move back toward the average over time. They can also signal potential price breakouts because if the price moves outside the bands, then it could indicate the start of a strong trend.

6. Fibonacci Retracement

Crypto traders use the Fibonacci retracement indicator to identify potential support and resistance levels of a price trend. The method is named after the Italian mathematician Leonardo Fibonacci, who introduced the Fibonacci sequence to Western mathematics in the 13th century. This indicator basically generates horizontal lines that indicate where support and resistance are likely to occur, and the most commonly used ratios are:

• 23.6%: A shallow retracement level that suggests the trend is strong.
• 38.2%: A moderate retracement level where traders often watch for potential bounce-backs or reversals.
• 50%: Not officially a Fibonacci ratio, but widely used as it often represents a significant retracement level where the price might find strong support or resistance.
• 61.8%: A deep retracement level where the price often finds significant support or resistance, indicating a strong possibility of reversal.
• 100%: Indicates a full retracement, where the price has moved back to its starting point, often signaling a potential reversal or continuation in the opposite direction.

Fibonacci Retracement levels are particularly used by traders to set stop-loss orders accurately below a Fibonacci line, avoiding closing positions in loss before a trend reversal.

7. Stochastic Oscillator

This momentum indicator is commonly used by traders to identify overbought or oversold conditions that could determine a potential reversal in the chart. It was created in the 1950s by George Lane, and it basically compares the closing price of an asset to its price range over a specific period. It is composed of two lines and the stochastic values:

• %K Line: It is the primary line and typically uses a 14-period range (such as 14 days or 14 hours) and shows the asset’s position relative to the range’s high-low.
• %D Line: It is a moving average of the %K line, usually over a 3-period span, and it’s often referred to as the “signal line” and is used to generate trading signals.
• Stochastic Values: The Stochastic Oscillator produces values between 0 and 100. Consequently, if:

• The value is above 80, the asset is overbought.
• The value is between 20 and 80, the asset is in a neutral phase.
• The value is below 20, the asset is oversold.

This indicator can be useful in recognizing overbought and oversold conditions and can help traders in their decision-making processes.

8. On-Balance Volume (OBV)

It is a momentum-based indicator that measures the cumulative buying and selling pressure to make price predictions. It was developed by Joseph Granville in the 1960s, and it’s a simple, powerful tool used by crypto traders to anticipate potential price movements. The OBV is based on the premise that volume precedes price movement, and the underlying idea is that a significant trading volume that brings a price movement means buying or selling pressure, which is likely to continue pushing the price in the direction of the trend. If:

• OBV is rising: It suggests strong buying pressure and a likely continuation of the trend.
• OBV is falling: It implies strong selling pressure and a likely continuation of the trend.
• OBV is flat: It means that the market is in a consolidation phase.

9. Parabolic SAR

The Parabolic SAR (Stop and Reverse) is a trend-following indicator developed by J. Welles Wilder, the same creator of the Relative Strength Index (RSI), and it’s mainly used by traders to identify potential reversal points, helping to decide when to enter or exit a position.

It is represented on the chart with a series of dots placed above or below the price, and the position of these dots indicates the direction of the trend:

• Dots below price: If the dots are below the price, the indicator suggests that the market is in an uptrend. 
• Dots above price: If the dots are above the price, it indicates a downtrend.

10. Ichimoku Cloud

The Ichimoku Cloud is a complex technical indicator that provides insights into trend direction, momentum, and potential support and resistance levels. It was developed by Goichi Hosoda in the late 1930s, and it’s commonly used by crypto traders thanks to its ability to offer a holistic view of the market. It is composed of 5 elements:

• Tenkan-sen (Conversion Line): Short-term moving average, calculated over nine periods, that provides insight into short-term price momentum and can act as a signal line.
• Kijun-sen (Base Line): Medium-term moving average, calculated over 26 periods, and represents the mid-term trend and can also serve as a signal line
• Senkou Span A (Leading Span A): Its line forms one edge of the Ichimoku and represents a moving average of the Tenkan-sen and Kijun-sen, acting as a dynamic support or resistance level.
• Senkou Span B (Leading Span B): This line forms the other edge of the Ichimoku Cloud and is based on a longer time frame, and it also serves as dynamic support or resistance.
• Chikou Span (Lagging Span): It is a lagging indicator that helps confirm trends by showing the current price in relation to the price 26 periods ago.

Prioritize Risk Management

Now that you have a clear understanding of the most common technical indicators for advanced crypto trading, it’s once again the moment to recommend sound risk management practices to limit losses while seizing the opportunities of the crypto market effectively. As the most famous investor in the world Warren Buffet once said: “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.” meaning that it’s more important to avoid losses than making a profit since recovering losses is more difficult. In your crypto trading journey, consider using Trakx crypto baskets to implement advanced diversification and automatic rebalancing, ensuring sound risk management and peace of mind with institutional-grade strategies and security measures.