The Secret Of Using Alerts and Indicators for Trading Crypto
The amazing "Crypto Space" that we are all apart of is one like no other. One where even the smallest of news, event updates, or social media shout outs can cause a pump or a dump in volume across the board.
Where events like the 3rd Bitcoin Halving (Which took place on May 11th, 2020) caused a spike in the mining hash rate resulting in a historic all-time high.
High hash rates prove that Bitcoin miners believe that mining is still profitable. Additionally, the higher the hash rate, the harder Bitcoin becomes to mine which adds validity to its present price levels.
And as a Crypto trader / investor - all of this information is vital to our trip to the moon. We need to know how similar news or events are affecting the whales of our industry - immediately.
But with thousands of different exchanges and a market that doesn't sleep, how can we realistically whale watch around the clock? And by the time these events make it to the news outlets, it's already too late for us.
Trading indicators are tools that have been utilized by the most successful and savvy investors for centuries. Trading indicators help investors perform their technical analysis by confirming price and volume movement.
When used effectively, a trader can verify if a trend in the price or volume will remain the same, face a correction then continue, or face a hard correction. Every scenario is essential and can make the difference between a green and red trade.
There are four main types of technical indicators.
- Trend Following
We will be covering the meaning for each of these types of indicators and provide examples as well.
Remember to Follow The Trend
Ever heard of the term "The Trend is Your Friend?" Trend following indicators help to do just that - follow the trend. If we are in a downwards trading channel on the charts - or "bear trend" - then buying positions to hodl long-term may not be the best short-term play.
On the other side of things, selling your positions while you are in an upward sloping trend - or bull trend - may cause you to FOMO buy-in later at the top!
Going with the trend is going with the flow. Fighting against it or "trying" to time a trend reversal can cost you. Here are some of the primary trend-following indicators used in the industry today.
The "Not So Average" Moves
The most well-known trend following indicator may be the moving average. The moving average analysis price data from a set specific range of days. The two major types of moving average indicators are the SMA and EMA.
Simple Moving Average or SMA –A simple average of a stocks closing price over an indicated amount of days. If you are using a 100-day SMA, you would add up the trading days of prices and divide that by 100.
**In this chart, the blue line represents the Moving Average. See the price movement of BTC once it’s trading above, and below the blue MA line**
Since the SMA calculates the historic trailing trading days, the most recent of news and stock movement may not be clearly represented by the weight of the other older days. This is where the EMA comes in to play.
An Exponential Moving Average or EMA - aims to correct the "lag" in the averaging time that the SMA delivers. Instead of evenly, or simply averaging the data over a set range of days, the EMA gives more weight to recent trading days.
The EMA weighted formula is more complex than an SMA, but it is also automatically calculated for you by the exchange or trading platform. An EMA is usually better suited for day trading, but traders also prone to experience more "fake outs" in trend directions.
What is an Oscillator and How Can We Use Them?
Along with the moving averages, Oscillators are the most commonly used indicators in a technical analysis.
Oscillators move within an upper and lower band or set levels that help to determine whether a Crypto is currently overbought or oversold. The lower the numbers, the more upside potential it has. The higher the number, the more downside potential it has.
Oscillators are great tools that can help identify a hidden upcoming major move in the charts.
A Look Into The "MACD" Style
MACD, Or, Moving Average Convergence Divergence is one of the more commonly known oscillators. MACD fluctuates above and below the number 0 represented by a line.
**MACD acts as an add on which appears below the standard chart**
The MACD shows both the momentum and trend direction of the stock. Created in 1970, MACD is made up of two lines - the MACD line, and signal lines. When the MACD number is above 0, there is more than likely an uptrend in price occurring and vice versa.
The MACD line moves faster than the signal line as the signal line is a moving average of the MACD line. Therefore the MACD line itself may act as a better indicator for a short term trend reversal, and the signal line may be better suited for a long term trend confirmation.
What is the relative Strength of The index?
Relative Strength Index is Another popular and comparable oscillator indicator to the MACD. Just like the MACD, it was also created in the 1970s. The RSI can be found below the main chart on a portion of its own graph.
RSI takes the average price of a crypto on its up days and divides that number against the average cost of a crypto on its down days over a specific range of days. The standard timeframe used is seven days.
** Shown below the original chart In Purple, the RSI closely correlates with the actual BTC price movement above. Notice what happens to the price of BTC once the RSI is oversold below the 30 range, and overbought above the 70 range.**
Unlike the MACD, RSI is measured on a scale ranging from 0-100. Anything over 70 represents overbought conditions, which means a pullback in price and possible trend correction could be in store.
Any number below 30 represent oversold conditions. If the RSI is at or below 30, it would be safe to say that this crypto has been on a price and trend decline. However, oversold conditions are commonly a healthy sign of upwards price momentum and a bull run that is close by.
Is It Too Volatile? Or Not Volatile Enough?
The Crypto wild wild west as some may call it. What may be considered THE most volatile tradeable market in the modern-day. And for such movements, we have volatility indicators to help us prepare for those shifts.
The next indicators we are going to cover measures and displays the swings in price action. The more substantial the price movement, the higher the volatility. The smaller the price movement, the lower the volatility.
The volatility of a crypto is essential for many reasons. There's risk tolerance/management, but there have also been countless occasions where an open sell order has sat on exchange waiting to be filled for some time due to low volume.
Adapting more of a Warren Buffet trading approach, we also want to make sure that we are buying shares when they are undervalued instead of overvalued – of course right?
What is Standard Deviation’s Role in Volatility?
Standard deviation is the most commonly used tool to measure volatility. Standard deviation shows us the difference between the price a crypto is currently trading at, versus its actual average market value.
The higher the volatility, the larger the standard deviation. Essentially, standard deviation provides the relative risk of a crypto – or if it’s worth buying at a certain time and price.
Trading Within the Bands
Bollinger bands are easy to read, to the point volatility indicators. They are calculated based on the distance of price from a moving average over a specified number of bars, typically 20. Bollinger bands indicate both volatility and direction.
Once applied to a chart, you can see that the line on the graph that represents the cryptos price movement travels within the Bollinger band. When the price volatility is high, the bands widen, when price volatility is low, the bands tighten.
**Notice that at it’s most drastic of moves whether up or down, the bands are at it’s largest**
In this scenario, long-term investors may prefer an entry into a crypto with a tighter or smaller Bollinger band range - while traders who are looking for a quick scalp or swing trade may dare to enter into a crypto that currently has a wider band formed on the charts.
How Long Will This Trend Last?
The ADX indicator is another volatility indicator but is used on a macro level to gauge the overall strength and movement of a trend rather than on a micro level to gauge the intra-day action of a crypto.
The ADX determines the strength and movement of a trend by comparing the highs and low of a crypto over a set period of time. The most common time frame used for ADX indicators is two weeks or fourteen days.
Like many of the indicators that we have covered, the ADX uses a range of numbers to signal trend movements. The start of the trend can usually be confirmed once the ADX reaches a range of 20-25.
When the ADX moves below 25 or 20, the end of a trend usually follows. Whether it is an uptrend or downtrend, the ADX above and below 25 scenarios are interchangeable.
The Fourth and Final "Level"
Every indicator we have covered up to this point holds its own importance. However, even if they "fail" us, as long as our "levels" don't, then we may still be in the clear.
These levels, the Support and Resistance, act as past, and potential future price touchpoints for our shares. Support and resistance levels are used both when shorting or longing a stock.
While investing and trading itself is mainly psychological, support and resistance lines act as public psychological milestones for the market to speculate on or rather formulate an opinion from.
Hodling Strong With Extra Support
“Strong Support” to an investor, is what a large, empty luscious green pasture is to a bull. In-fact, many whales, Crypto bulls and Bears strongly invest based on previous support levels.
As we know, over time, a Crypto’s market performance forms a pattern on it’s chart. Within that chart and pattern may very well be wild price action swings in both directions, but there is usually a common “floor” / Bottom / or support level.
**The chart above shows BTC on a 3 year chart. Reading from left to right, the Blue lines all show key support levels over the past years**
Let’s say we have Crypto Coin A that has been trading for a year and is currently priced at $1. Over the past 12 months Coin A has seen prices as high as $1.50, and as low as $0.75. Although it has visited the $0.75 range two times, it has never once dipped below it.
In this scenario, a trader may wait to see if the current price drops from $1 to $0.75 a third time and holds that level of “Support” before investing. This would called a “triple bottom” as the price touches the bottom or support a third time before eventually going on a bull run up.
You Can’t Go Higher Than The Ceiling
On the other end of support is resistance. Taking the same scenario above into consideration, if Crypto A coin has went as high as $1.50 in price movement before, but never broken out of that range, a new psychological market ceiling may have been formed.
A trader may think of entering now at $1 with the thought process of liquidating a portion of their shares around $1.50 just incase the price is rejected a second time to form a “double top.” A double top usually indicates a sharp decline in price shortly after it.
**The infamous $20k Bitcoin top that formed in 2017, going into 2018 can be seen on the chart above. The first orange arrow on the left shows the first $20k price touch, followed by the second which failed to brake out and led to a sharp downtrend. And the trend continues with new tops being formed followed by sharp declines**
Once a resistance level is broken, the prices seem to “fly” and this can indicate a bull run with that new resistance level turning into a support level.
The Bottom is defended by bulls, the resistance levels defended by bears. Regardless of which category you fall into, you can use both perspectives to help increase your Bag.
Putting It All Together
If you were wondering what the best crypto indicator was before reading this article... Well, you might still have that same exact question. The truth is that it's really up to the trader.
There's no one size fits all here, and we recommended testing multiple indicators. Some traders use a combination of all four indicators simultaneously - while other traders feel that one or two indicators are more than enough.
However, finding your "zone" and comfort level with indicators can seem like an overwhelming task, and it can be... Trust us... We know from first-hand experience, and that's also why we created Aware.
Aware is a user-friendly, fully customizable Crypto Indicator Platform that allows you to get as creative as you'd like to create your "perfect" trading indicators.
Many exchanges are limited in the number of Cryptos and Indicators they have to offer. It's inconvenient as an investor to be forced to join multiple exchanges just to follow a specific coin, or for particular indicators. What's worse?
Settling for not being able to use a favorite indicator of yours just because it's not available... In a Space based on futuristic technology, we saw the need for Aware to be ample for our trip to the moon.