Knowing in which direction the cryptocurrency market will move is a difficult job. The last couple of bull markets have been so unpredictable that traders simply have no idea what to anticipate next. But no matter how erratically crypto assets moved, tehre is always one tool you can use to predict what’s next: crypto indicators.
A crypto indicator, also known as a trading indicator, is a tool that predicts an asset’s price movement. The indicator makes prediction by using technical market data and complex mathematical formulas. By combining the two, an indicator tells you the probability of an asset facing bullish or bearish market pressure.
In this article, I’m showing you how to trade the 6 best crypto indicators. You’ll explore some of the most popular technical indicators in the market. Additionally, I’ll give you tips on how to trade with the indicators and which mistakes to avoid.
What are Crypto Indicators?
A trading indicator is a tool that predicts the trend of an asset using market data. Indicators apply mathematical formulas to momentum, volume-driven data, or past price action, to determine whether the trend is bullish, bearish, or neutral.
A common example of a trading indicator is the Relative Strength Index (RSI). This indicator calculates the strength of an asset depending on how many shares were bought or sold. The higher end of the RSI range (>70) is classified as overbought, while the lower end (<30) as oversold. When an asset reaches either range, it will reverse its direction and trend in the opposite direction.
Lagging indicators (e.g. moving averages or MA) analyze past price action and its underlying circumstances. If similar circumstances appear on the chart, you can trade the asset expecting the same outcome to occur.
Leading indicators (e.g. stochastic oscillator) predict future price action – typically by analyzing momentum. You can trade with leading indicators when you’re interested in discovering whether an asset is overextended.
Two more types include oscillators and overlays. Oscillator indicators have a minimum and maximum range – as explained in the RSI – placed beneath the price chart. Some traders compare price action and oscillator values to spot divergences.
Overlay indicators are plotted on top of the price. For example, Fibonacci lines are overlay indicators that use a mathematical formula to predict support and resistance levels.
Trading with the 6 Best Crypto Indicators
Moving averages, or Simple Moving Averages (SMA), are lines plotted across the chart calculated using the average price data within a time range. For example, the 21MA (21-day moving average) draws a line based on the average value of 21-days worth of price action.
You can customize the MA range however you want. But the rule is to use 7-day and 25-day MAs for LTFs and 50-day and 200-day MAs for HTFs.
Most traders combine a range of MAs to define support and resistance levels. If an asset trades slightly above a MA, traders believe it might hold – therefore buying it at that level. Similarly, traders might want to open a short position at the level of a HTF MA located above the asset believing it will act as resistance.
Patterns also take place. If an MA crosses below or above another MA, the asset might violently move in a bullish or bearish direction weeks after the pattern forms. These patterns are known as Golden and Death crosses.
The slope of an MA indicates the asset’s momentum. Sharp angles show that market forces push the asset up or down. Slopes also act as support and resistance.
To summarize, you can use MAs to determine:
Setups (entries & exits)
Support and resistance
However, note that MAs are lagging indicators. Use them with caution and exclusively at HTFs. MAs are not strong indicators until a trend is fully formed.
Exponential Moving Averages
Exponential moving averages (EMA) represent the faster version of SMAs. They react to changes in the market more rapidly and dynamically, hence they are good for LTFs and intraday trading. While SMAs apply an equal weight to market data across the entire range, EMAs place a heavier emphasis on the most recent price data.
Rather than the closing price, certain variations of EMAs utilize the open, median, high, or low price of an asset. For short-term trends you should use 12-day and 26-day EMAs and 50-day, 100-day or 200-day EMAs for long-term trends. Similarly to SMAs, crossing a line indicates trend reversal or strengthening.
Some believe that EMAs are better because newer market data more accurately predicts future price action. However, others believe that the data is too recent to reliably predict price, and that EMAs offer false alarms.
Moving Average Convergence Divergence (MACD)
The Moving Average Convergence Divergence (MACD) is a momentum-based oscillator indicator. However, unlike its oscillator brethren, the MACD does not have a local range. Its line traverses alongside the volume section of a chart freely. Therefore, it doesn’t identify overbought or oversold conditions but exclusively momentum.
Positive MACD figures indicate bullish trends while negative bearish trends. You can calculate MACD by subtracting the 26-day EMA from the 12-day EMA. Apart from the MACD line, there is also a nine-day EMA dubbed the signal line placed on top of the MACD. The signal line provides buy or sell signals depending on how it moves along the MACD line.
How do you trade MACD? You should buy everytime the signal line drops below the MACD line, and sell everytime the signal line rises above it. You’ll find that crossovers are stronger when they mirror the asset’s price trend. An alternative for MACD is to compare the MACD duo with the price chart and apply divergences.
The core problem with MACD is that the indicator can sometimes imply a reversal without one happening. To make matters worse, a reversal can occur without the MACD spotting it.
Relative Strength Index (RSI) is an oscillator indicator that forecasts oversold and overbought market conditions. Whenever investors panic and sell an asset too strongly, the asset enters an oversold phase during which buyers step in. The opposite happens when investors spend so much money that an asset skyrockets. RSI analyzes momentum to confirm one of the two conditions.
The RSI indicator’s value ranges from 0 to 100. Assets are overbought when above 70% RSI and oversold when below 30% RSI. Anything between is fair game. However, assets may react to 50% RSI which the market considers to be a neutral area.
Keep in mind that it’s normal for RSI to tap 70% RSI frequently during an uptrend. The indicator is fairly inaccurate during trending phases. What’s not normal is for RSI to reach 70% when in a downtrend. When anything out of the ordinary happens, the asset might reverse its course.
You can draw trendlines across RSI to spot areas ripe for reversal.
The chart above shows a trendline drawn across a downtrending RSI value. When RSI broke above the trendline in February, Bitcoin broke out of a downtrend and began slightly rising up. This pattern signifies a potential reversal at HTFs. However, it may not necessarily play out.
The Fibonacci sequence is everywhere. In TA, the magic of Fibonacci is used to draw retracement levels – horizontal prices acting as support or resistance. With the tool, you need to connect two price points – usually the highs and lows – and the indicator will draw out levels based on their retracement points (23.6%, 38.2%, 61.8%, and 78.6%, and 50%).
The chart above is an example of weekly support and resistance levels drawn out by the Fibonacci indicator. I have connected $43,178 as the low and $65,505 as the high. Note that I chose the bottom and top of the body, not the wick. Moreover, I chose to connect the bottom price point that formed after a previous rally (from $31,000 to $51,500).
Last but not least, I have specifically connected candles, whose neighbors to the side, are both located lower. You will correctly use the indicator even if you connect a candlestick with a neighbor on the same level as the one in the middle. All that matters is that there isn’t a candle that closes higher than one in the middle.
Now let’s get back to the original chart. A weekly candle might have closed below a line (e.g. 1.272) but the price always remained in the range. The same happened at the levels between 0.618 and 0.786 or between 0.236 and 0.
From what we can see, the price has to fully close above a resistance level for two consecutive weeks in order to reclaim it as support. Simply tapping the resistance will not suffice. The same applies to breaking down below a support level. Even though the first weekly candle of 2022 closed below 1.272, Bitcoin remained above it.
The Fibonacci indicator also helps with drawing targets for taking profit. By connecting a low to a high, you are drawing retracement levels. But by connecting a high to a low, you create extension levels. Extension levels are basically price points where you can expect resistance. It comes in handy when you’re not sure how far the price might extend during a rally.
In this case we have connected $43,311 with $33,702. We see that the price retraced immediately to 0.5, a point which acted as resistance for an entire week. But after buyers broke 0.5 and closed above it, the price went up to 0.786 and held onto it for hours. After that, the price once again reached a new fib line after almost taping 1.271 ($45,294).
You can draw extensions at any time frame. However, you’ll find that both retracements and extensions are more accurate when drawn over HTFs.
Crypto Fear and Greed Index
You can’t use some indicators together with charting software – one example being the Crypto Fear and Greed Index. This indicator collects and processes data to predict sentiment by ascribing moods such as fear and greed to the market.
As you have learned in the trader psychology section, fear and greed are psychological factors that influence investors and their behavior. Whenever greed rules, investors ride the wave and buy like there’s no tomorrow. When fear rules, investors sell assets believing that the market is done for and that the asset will not recover anytime soon.
There are two ways to trade with the index: be a contrarian or follow the herd.
Contrarian trading means that you buy fear and sell greed. You’d do this believing that the market has overextended in either direction and that a retracement might soon follow.
Following the herd means that you sell fear and buy greed to trade along with the market. However, remain cautious applying this tactic as following the herd at the extremes of fear and greed might not prove to be profitable. Always try to buy and sell when the indicator swings slightly towards either mood.
The indicator combines the following data to measure fear and greed:
Market volume (25%)
Social media (15%)
Bitcoin dominance (15%)
Google trends (10%)
If you compare the indicator’s data with the Bitcoin price chart you’ll discover that both follow the same trend. When Bitcoin dropped to its $28,000 lows in July 2021, the index reported extreme fear ranging between 10 and 20. But during the rallies in August, and later in November, the index indicated extreme greed averaging at 80. Now that the market has reached old lows again, the market is at 20% fear.
Controlling Risk with Crypto Indicators
The magical thing about crypto indicators is that they help us better understand where the market is currently located and where it is potentially headed. Indicators allow you to visualize market data and apply mathematical formulas which calculate support and resistance levels. But since people trade financial markets, and not robots, these price levels are not always respected. This means that you cannot fully rely on indicators and expect their results to be 100% accurate.
Indicators are here to indicate. An oversold RSI level indicates that an asset might have reached a temporary bottom. However, there's no way of telling whether the bottom has already formed or whether the price will crash once more. If you seek accuracy, I recommend combining indicators, price data, and market models to find confluence.
Confluence is a crypto jargon used to describe bullish or bearish market directions that are backed by two or more factors. Let's say I want to buy spot Bitcoin at a secure support level. The Fibonacci tool tells me that Bitcoin should find support at $19,000. However, a single indicator should decide whether I buy or sell. So I add the RSI indicator and discover that Bitcoin is only a few points away from entering oversold conditions at 30 RSI. Now I have two indicators telling me that the bottom is here and that I should buy.
The above scenario is an example of confluence. Discovering that a 200-week MA is located right at $19,000 would also assist with confluence and make my case more clear. And the more indicators have a consensus on where the market might go next, the higher is the chance of my trade going right. Therefore, you should always look for confluence if you wish to control risk when trading with crypto indicators.
If you want to learn more about crypto indicators and trading cryptocurrencies, I recommend reading the following articles:
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.