Trading Indicators – a Comprehensive Guide

Trading indicators are an essential tool in crypto. Whether you are a beginner or a seasoned professional, indicators can help you out. However, tackling this topic as a newcomer can feel intimidating. But don’t worry – we are here to help! Dive into our trading indicators guide to know more! 

 

The Roots of Trading Indicators

Let’s start by taking a step back. Trading Indicators link to a crypto trading discipline called technical analysis. This method is widely used in day trading cryptocurrency. To break down trading indicators, we should first understand trading itself.

From Morse Code to Day Trading

Back in the 19th century, trading used to be an exclusive practice. It was only available for people working in financial institutions. Can you guess the main factor that made trading more widely available? Yup, it was technology! Although, not the kind of technology you probably have in mind. The second half of the 19th century saw rapid developments of the telegraph. For our younger readers – telegraph was a communication system. It transmitted information over a wire through a series of electrical current pulses. This was usually done in the form of Morse code.

So, how did such a primal communication device revolutionize trading? Well, it was all about sharing information. Trading used to be so exclusive because information and access were scarce. Traders made investment decisions based on transaction and market data. The telegraph made it possible to share this information. This was a novel approach in the field.

Stock markets started using ticker tape to communication transaction data to brokers. All trades had to go through brokers and ticker tape eased the access to them. This increased trading frequency. But also, it sped up the process of trading. Transaction data made it possible to trade assets within a short time. For instance, a day. And this is how day trading was born. 

Are you looking for the ultimate guide on day trading cryptocurrency? Check out our blog post on this topic! It covers everything from A to Z.

 

Trading Indicators as part of Technical Analysis

So, let’s fast forward 150 years. Day trading is currently known as a fast paced trading method. Unlike in the early days, it is highly digital. There are plenty of different day trading strategies for doing this. Traders pick them depending on their interest and experience. We have a practical guide on picking the right cryptocurrency day trading strategies. Check it out for some useful tips!

One of the most quantitative strategies is technical analysis.

 

Intro to Technical Analysis

Technical analysis focuses on internal market events. This strategy involves studying price charts and diving into data. So, traders analyze the historic price movements of assets. In particular, they mark price upticks and decreases. Ultimately, they make trading decisions based on it.

There are various approaches to chart analysis. Each trader has an individual view. And this is where day trading cryptocurrency tools step in. Let’s focus on trading indicators.

Trading indicators purpose

Technical Analysis Indicators Explained

Technical analysis can be hard to grasp at first. This is why traders need numerical indicators to help them in analysis. Trading indicators help traders figure out the price direction of an asset. They are helpful in both long and short term price analysis. So, you can look at trading indicators as calculations. They signal the events that are bound to happen in the trading market. 

Trading indicators are not exclusive to cryptocurrency trading. They are also used in analyzing the price of other assets. For instance, stock, securities, currencies or commodities. Yet, we are focusing on crypto trading for this article. 

Trading indicators can measure a wide array of aspects. For example, price movement, volume, momentum and other factors. As with many topics in trading, this is individual. Traders have different views on which signals to rely on. Some prefer historical price over profit and vice versa.

 

Trading Indicators List

Now, it’s time for details! Are you wondering, what are the best technical indicators for day trading? The ones we will cover in this article are:

  • Relative Strength Index (RSI)
  • Simple Moving Averages (SMA)
  • Moving Average Convergence Divergence (MACD)
  • Stochastics Oscillator
  • Momentum
  • Average Directional Index (ADX)

Does this sound like complicated jargon to you? No worries, you’ll understand these terms after finishing this article. As previously mentioned, there are many types of technical indicators available. We only selected a few to focus on right now. So let’s get started with trading indicators that work!

Trading Indicators - Which indicators to choose

Relative Strength Index (RSI)

Relative Strength Index (RSI) aims to quantify the gains and losses of an asset over a fixed period of time. It is one of the most popular indicators used in trading. RSI is quite universal. So, both beginners and pro traders tend to use it. 

The Relative Strength Index has a scale of 0 to 100. In specific, it helps a trader understand the value of an asset. So, you can tell whether a crypto is overbought or oversold. For instance, if the RSI indicates around 70 for an asset, it is overbought. Yet, when it shows around 20 or 30, it is oversold.

So, what else can you do with the RSI? Well, it will help you determine bearish and bullish trends of a cryptocurrency. An RSI below 50 means bearish tendencies. Similarly, if you notice movements between 0 to 50 for a long time, this means a bearish cycle. On the other hand, an RSI above 50 shows bullish tendencies. And fluctuations between 50 and 100 – you guessed it – bullish cycle.

Simple Moving Average (SMA)

Moving averages are a popular category of indicators. There are many variations of averages. Let’s start from the most basic concepts. The Simple Moving Average (SMA) represents the price of a cryptocurrency over time. Sounds simple, right? 

You can calculate the Simple Moving Average by adding up closing prices. You then divide them by the number of time periods chosen. When automized, the indicator naturally calculates this for you. MACD helps traders to track price developments. It is a basic but efficient signal for spotting trends and opportunities. For instance, you can determine short and long term averages. If a short term average crosses a long term average, this can signal a price increase. This is known as the “golden cross”. 

The Simple Moving Average is customizable. So, it is useful for traders with different experience and interests. You can take this basic indicator and create a signal that matches your level of complexity.

Moving Average Convergence Divergence (MACD)

Let’s continue on the topic of moving averages. Moving Average Convergence Divergence – better known as MACD – is well known among traders. It is used for signalling the beginning of short-term price trends and reversals. So, it is most often used for short term trading decisions. MACD is a true trend indicator.

Calculating the MACD also requires the EMA. That is the exponential moving average. You have to subtract the 26-day exponential moving average of a crypto from the 12-day EMA. 

But how to read the MACD result? Well, if the 12 day EMA is above the 26 day EMA, it is considered positive. This means a momentum is rising. But if the longer term moving average is above the short term average, the momentum is passing. So, you should sell.

There is another trackable nuance here. Some traders also follow the “signal” line. What is that? Well, it is a 9 days EMA. This helps traders identify the buy/sell decisions. If the MACD moves above the signal line, it suggests a bullish run. But when the line sees MACD running below it, we can expect bearish movement.

Stochastic Oscillator

Let’s take a moment to get the pronunciation of this right. Are you still with us? Good. Stochastic Oscillator is a reputable indicator in the crypto world. It is a two line momentum indicator. Stochastic Oscillator measures the difference between the closing price and the range of prices over a time period. Usually, it calculates a score based on 14 day’s prices.

So, what does the score actually signal? Well, anything above 80 means that an asset is overbought. On the opposite end, a score below 20 means it is oversold. Similarly to the Relative Strength index, the scale runs from 0 to 100.

Momentum

This indicator doesn’t need as much explanation. As the name suggests, it helps crypto traders judge the strength of a price movement. Momentum compares the closing prices of cryptocurrencies over time. 

So, how does this look on a chart? Momentum appears as a single, simple line. Traders can understand how fast price movements are happening by comparing it to the line. In essence, the higher the reading reaches above 100, the faster the price is rising. On the other hand, the lower the result is below 100, the faster the price is decreasing. This is helpful for spotting when trends are losing or gaining momentum. For instance, the price of a cryptocurrency can be moving downward. Yet, the lows on the momentum indicator are increasing. So, this means that a sell-off may be losing intensity. 

Average Directional Index (ADX)

Our next indicator is all about quality. The Average Directional Index (ADX) inspects the quality of a price movement. In other words, the strength of a trend. The trend can be either going up or down. So, the ADX includes two accompanying indicators. These are the Negative Directional Indicator (-DI) and the Positive Directional Indicator (+DI).

Because of this, ADX is usually visualized by three separate lines. They help traders understand if a trade is reasonable. The Average Directional Index has a score from 0 to 100. Yet, it is a non-directional signal. So, it doesn’t show a specific price movement direction. Instead, it shows the strength of a price movement.

If the indicator reads above 25, traders tend to implement trend-trading strategies. But if the score is below 25, traders tend to do the opposite. To conclude, a score of 0-25  marks no significant trend. 25 to 50 shows a weak trend. 50-75 marks that the trend is medium. And, 75-100 shows a strong trend.

 

The Wrap Up of Trading Indicators

Trading indicators help traders get a deeper understanding of the market. They assist in analyzing price action and making trading decisions. So, what should you do with the information you just learned?

Well, you can go ahead and set up your own indicators to improve your trades. However, remember that using trading indicators is just one of many strategies. They are not required for trading, but they can sure be helpful. Using indicators in an informed way helps to find success in the market. 

 

Now that you know all about trading indicators, it’s time for some practice! Start improving your trading skills by heading over to the CoinMetro crypto exchange! In case you have any questions, our support team is here to help 24/7.

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