Most investors know about technical indicators, which is a subset of technical analysis (TA). Indicators allow you to forecast future price movements or trends by analyzing historical pricing data.
But why are technical indicators so effective? Crypto markets are often truly random as many investors bet upon the direction of the market. However, it’s possible to find patterns in this source of randomness. Technical indicators can help you to declutter some of the randomness crypto markets present.
Therefore, it’s crucial to understand that we don’t want to win every trade. We want to gain just that extra bit of intel to win a couple more trades. Our goal is to close more than half of the trades successfully. By gradually learning more about markets, experimenting with technical indicator combinations, we try to gain a more significant edge over other investors.
So, why did I tell you all of this information? This article takes a more in-depth look at popular technical indicators and which indicator combinations work best.
Got excited? So are we!
Here are three of the most popular technical indicators.
The Moving Average indicator calculates the arithmetic mean of a given set of pricing points over a period. Therefore, we can use different moving averages for periods ranging from 15 up to 200 days.
The moving average helps us to smoothen pricing data to eliminate random price fluctuations. The Moving Average indicator gives us an idea about future price direction. Note that a 15-days MA is much more sensitive to price fluctuations and might provide a different result than a 200-days MA.
For this reason, traders recommend using two or three MAs to predict a future price trend. Investors commonly use the 50-day and 200-day Moving Average lines.
The MACD indicator is a momentum indicator. It allows us to identify momentum trends. Traders often use momentum indicators to identify overvalued or undervalued cryptocurrencies.
First, the MACD indicator subtracts two moving averages to plot a line that indicates the difference between both lines over time. For example, it subtracts the 12-day and 26-day moving averages.
Next, the MACD indicator uses the exponential moving average indicator for a given period. This indicator is often a 9-day exponential moving average as we want to identify short-term momentum. Again, we plot this 9-day exponential moving average as a line on the chart.
Now comes the exciting part.
We can identify momentum trends by looking at convergence and divergence. When both lines converge, it means that the moving averages are coming together, while divergence means the opposite. A converging moving average indicates that the momentum is getting weaker, while the opposite is valid for a diverging moving average.
Traders love it when both lines cross, as that often indicates a momentum change.
The Bollinger Bands indicator provides a range within the price of an asset typically trades. Traders can use this indicator to determine the current volatility based on the price within these bands.
When the crypto’s price trades outside the upper band, it indicates that the cryptocurrency is possibly overbought. The opposite is valid for an asset that trades below the bottom band.
Traders commonly use Bollinger Bands to create an entry or exit strategy. For example, you want to place a buy order when an asset hits or crosses the bottom band. Frequently, an asset will bounce off from the bottom band.
Now, let’s explore different multi-indicator strategies.
A multi-indicator strategy allows us to gain insights into the current market from different angles. We can use different types of indicators, such as trend indicators, momentum, or volume. When combining these technical indicators, they offer us a unique insight into the current market.
Let’s explore our first multi-indicator strategy!
Our first strategy consists of three different indicators that each represent a different insight into the market.
The next strategy uses a combination of RSI, MA, and the Standard Deviation indicator.
Lastly, let’s explore a combination of RSI, ADX, and Bollinger Bands.
In short, by combining all three indicators, we can create a very accurate entry and exit strategy for trades.
Traders commonly use the RSI and ADX indicators to enter a trade, while the Bollinger Bands help determine the exit strategy. For example, when the price crosses outside of the Bollinger Bands in any direction.
Note that we are not limited to the multi-indicator strategies described in this article. It’s fair to use any combination of indicators as long as you pay attention to the types of indicators. Make sure to use a mix of trend, momentum, and volume indicators.
Let’s say you use a multi-indicator strategy that involves RSI, MACD, and the Stochastic indicator. All three of those indicators predict future momentum. It’s a real trap to fall into as they seem to agree upon an asset’s future price movement. However, they all tell you the same type of information. In other words, we are thrice inspecting the market from the same angle.
Furthermore, some indicators are more favorable as they provide you with crucial information to formulate your trading strategy. For example, the Ichimoku Cloud is a trendy indicator as it helps us determine support and resistance levels. These levels are an essential element for determining an entry and exit strategy.
→ Want to learn more about trading cryptocurrencies? Learn more in our trading guide.