The cryptocurrency price chart can be confusing if you have never had an opportunity to use it. You will see and stare at the many colors they use. Also, you will spend your precious time looking at numbers and colors that do not make sense. However, these charts are so far the essential tools you need to have to trade cryptos. Chart patterns, like the Best Indicator for Crypto Trading, can help traders make an investment based on the likelihood of an event occurring.
What are Indicators?
Indicators are tools that are designed to help a trader make the most from a crypto market. They are crypto tools that a trader can use to gauge and gain insight into market sentiments. Some collect and collate data points that a trader can analyze to make probabilities. These are essential points that help the trader interpret the market and place trades.
Other indicators will tell you when the asset is overbought or oversold. It happens when an asset experiences regular upward movement. Similarly, when an asset has had an extended downward trend, it is a case of an oversold asset. Therefore, indicators are important tools that give insight into when the price movement is expected to change direction.
The indicators may be used in a variety of markets that includes stocks, cryptocurrency, and forex. Long-term traders may hold an asset, but they need a variety of points before making investment decisions. This is where trading indicators come in. They help in analyzing the crypto market to help make appropriate decisions.
Of course, there are a variety of indicators that traders use to make decisions. Some of them are easy to use and are suitable for newbie traders, while others are complex and may require experience and high-level interpretation skills before they can be of use. This post looks at what trading indicators are and how you can optimize them to increase your returns.
But to use the indicators well, you must have a good understanding of both foundational and technical analysis knowledge. For example, here is how you can use different Moving Average indicators to trade cryptos.
Simple Moving Average
It is one of the indicators that can help a trader identify the direction in which the price of an asset is going. It is a pictorial visualization of price direction. It is normally represented in a curve. You could have a 12-day moving average, 26 days moving average, or 50 days moving average. All of them determine the price points within a specified period. Moving average curve is arrived at by dividing the average price by the number of days in the said period.
Moving averages point at changing sentiments. So, it will tell you whether it is changing to bearish or bullish runs. You may use moving averages as support points when the price of the asset falls. In fact, it is the reason why many traders look at them as the price floor. MA may be used in assessing the history of the asset in terms of support and resistance prices. It makes it easier for a trader to predict the direction in which the price will be heading to.
Exponential Moving Averages (EMA)
This is the cousin of the Simple Moving Average with a slight modification that enables it to respond more swiftly to the latest information in the market – you can think of this as the more price-sensitive one. How? By putting more weight on the recent prices, as compared to the older prices.
SMA simply calculates the average of price data, with equal weight to old and new or recent data. EMA on the other hand, assigns more weight to current data, so that will have more impact on the moving average compared to the older data.
It is also one of the most popular Moving Average indicators that allow a trader to compare two moving averages simultaneously. It can help a trader see the changes in momentum, and signal them to either buying or selling an asset. MACD is an abbreviation of Moving Average Convergence Divergence. It works in two ways; when moving, averages are converging or diverging. When they converge, it is a sign of reduced momentum (bearish trend), but when they diverge, it is an increase in momentum (bullish trend).
As with other indicators, there is no guaranteed success with using these. Some may prefer using just one indicator or none at all for more simple, uncomplicated, and straightforward trading. Others like to experiment with combining different types of indicators, waiting for a convergence of those before making a trading decision. Experiment with what suits you more and always mitigate the risk with good risk management.
You may also like: Forex Trading 101: Exemplary Tips to Master the Art of Trading
Image source: Dreamstime.com