How Indicators Work
Technical Indicators And Cryptocurrency Markets
The cryptocurrency markets are constantly in motion. Prices can rise or fall every few seconds based on whether more orders are being filled above or below the market's ask and bid prices. Also, there are potentially millions of orders which are executed everyday which can lead to volatile markets, whipsaws (quick price movements in an opposite direction), and large percentage increases and decreases in the prices of individual cryptocurrencies.
Understanding cryptocurrency market movements and price actions can be extremely challenging. The idea of simply investing in cryptocurrencies and making money is deceptively simple. More often that not, new investors lose money unless they enter trades early ahead of the crowd FOMO (fear-of-missing-out) and exit with the profits while looking for shorting opportunities when the market begins to show signs of weakness.
That's where technical indicators come in. Indicators help you discern what is happening under the surface of the markets and driving the price action by identifying trends, trade entry points, profit target zones, and shorting opportunities. The only trades you should be participating in are trades which are confirmed by your indicators, risk strategy, and follow market sentiment.
Insider Tip: Is It Easy To Make Money In Crypto Markets?
Not really. The Bitcoin 2017 Bull Run demonstrated this fact as the market started out near $1,000 in January and peaked near $20,000 in December only to fall to near $10,400 one week later. Buyers near the top lost half of their investment in a week, and the downtrend continued into a bear market. How do you make money then? There are ways to make good profits with carefully managed trades.
What Are Technical Indicators?
So, what exactly is an indicator? Well, that is a great question every trader should ask themselves. Traders should know and understand exactly what the indicators they are using measure and what the signals the indicator is giving mean. In short, indicators are representations of cryptocurrency market data.
What Indicators Are Visually
You usually see an indicator's visual representation as a set of data points with a plotted line connecting the points on your computer or phone screen. These data points directly correlate to the associated market chart the indicator is applied to, and they are what you see when you apply the indicator to a graph. Let's talk about what they really are though from a data standpoint.
What Indicators Are Actually
Indicators are actually sets of formulas and ratios which perform statistical calculations. The indicators analyze specific market and chart data. The data type depends on the specific indicator and can include things like volume, time, price averages, prices on bar open and/or close, moving averages, and more.
Types of Market Indicators
There are several types of technical indicators you should use when trading cryptocurrencies. These indicators fall into four primary categories which define their type (the way they operate). They are oscillators, trend followers, volume-based, and other analysis indicators.
- Oscillators are indicators which move up and down within a fixed range, between set levels, or relative to a baseline median to determine where current market action falls within the measurement relative to cumulative market action. Oscillators tend to be leading indicators of future market movement.
- Trend Followers are indicators which measure the trends in the market's price action and volume over time. They help to identity when a trend occurs by essentially measuring the market's forward movement to a higher or lower price position with related volume. These indicators help identify when established trends start to reverse leading to optimal trade setups. Trend followers tend to be lagging indicators with a historical perspective.
- Volume-based indicators identify volume coming into and out of the market during a given time frame usually in the form of a bar or candle or cumulative volume action at a price level. Volume-based indicators are lagging indicators because they show volume which has already entered the market.
- Other Analysis Indicators are indicators which help you understand what is happening within the channels of the chart. These indicators can be leading or lagging depending on the indicator. These indicators can help you determine things like support and resistance, rises and drop zones, and formations candle sets.
Click on the indicator below for examples and to see it in action on live crypto charts.
Volume-Based Indicator Examples
- Chart Volume (Vol)
- Visible Range Volume Profile (VPVR)
- Session Volume Volume Profile (VPSV)
- Fixed Range Volume Profile (VPFR)
- Net Volume
- Price Volume Trend (PVT)
*Several of these indicators also use trend formulas.
Other Analysis Indicator Examples
Best Practices For Using Indicators
There are several best practices to take into account while using indicators in cryptocurrency markets. Applying these best practices will give you a strong foundation for future trading in the cryptocurrency markets.
- Know how the indicators you are using work and understand what they measure. Applying this knowledge will help you use the indicators to find the best setups for your trades and understand the movement direction.
- Use a multiple time frame confirmation approach to identify trending indicators. The same indicator will give you different signals (sometimes opposite) on different time frames. Confirm trends found on shorter time frames (sub 1 hour for example) with a time frame that is two to four times the original time frame.
- Practice backtesting the indicators you use against a variety of historical candle formations. Take note of each new major market trend, how the indicator signals presented, and how and when they confirmed the new trend.
- Keep in mind that the markets are always changing. An indicator giving a "buy" signal may end up being a "sell" signal if the market fails to breakout and whipsaws or breaks support shortly after. Also, just because an indicator revealed a positive trend in the past does not mean it will continue to do so. Be vigilante and manage risk!
- Look for trend confirmation across multiple indicator signals. A new trend will usually reveal itself on several different indicators. Signals like upwards price action with a moving average breakout, a positive, bullish movement on an oscillator, and increased trade volume is a strong confirmation in an upward trend direction.
Following these best practices will enable you to use your chosen market indicators effectively and reach your highest trading potential.
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Learn about the indicators and play with live examples on the BTC charts!