Wed Apr 12 2023
Technical Analysis is a universal tool in trading, but it's only as effective as the way it's being used. Here are some of the main mistakes to avoid when using technical analysis in your algorithmic trading.
A Guide to the Most Popular Technical Indicators for Cryptocurrency Trading
Technical indicators are essential tools for traders to analyze price action and identify trading signals, whether trading manually or using an algorithmic cryptocurrency trading platform such as Æsir. There are many different types of indicators, each with its unique strengths and weaknesses. In this article, we’ll provide an overview of some of the most popular technical analysis indicators used by cryptocurrency traders.
The RSI is a momentum indicator that measures the magnitude of recent price changes. It shows whether an asset is overbought or oversold and has a value between 0 and 100. A value over 70 indicates overbought conditions signalling that a correct might be close, while a value under 30 indicates oversold conditions, which could lead to a positive upswing in price. However, extreme values may not always provide accurate trading signals, so it’s essential to consider other factors and indicators before entering a trade.
A moving average is a lagging indicator that smooths out price action by filtering out market noise and highlighting the direction of the trend. The most commonly used moving averages are the simple moving average (SMA) and the exponential moving average (EMA). Traders often use the relationship of the price to specific moving averages to gauge the current market trend. Moving average crossovers are also used as buy or sell signals. Moving averages made up of more candles (EMA50) average over a longer period and therefore signal bigger market movements, compared against smaller averages (EMA5), which only analyse the last 5 candles and therefore, smaller market movements.
The MACD is a momentum indicator that shows the relationship between two moving averages. It’s made up of two lines – the MACD line and the signal line. Traders use the MACD to determine the strength of the current trend and to look for crossovers between the MACD line and its signal line. Usually a positive momentum is sustained if the 0 threshold is broken upwards. The same idea applies for bearish patterns, but as with other indicators, this is never guaranteed and must be used as part of a larger whole, especially if you’re engaging in algorithmic cryptocurrency trading.
The StochRSI is a momentum oscillator that determines whether an asset is overbought or oversold. It’s derived from RSI values, and its values range between 0 and 1. A reading above 0.8 is usually considered overbought, while a value below 0.2 may be considered oversold. However, the StochRSI is more sensitive than the RSI indicator, so it may generate more false or misleading signals.
Bollinger Bands measure the volatility of the market and overbought and oversold conditions. They consist of three lines – an SMA (the middle band) and an upper and lower band. The upper and lower bands are typically two standard deviations away from the middle band. Traders use Bollinger Bands to identify periods of low volatility and potential future volatility.
Technical indicators are subjective, and their interpretation may vary from trader to trader. It’s essential to consider other factors before entering a trade, such as fundamental analysis (FA). Indicators are at their best when used in combination with each other, or with other methods. The best way to learn technical analysis (TA) is by doing, so just head over to Æsir and get started by creating an algorithmic trading strategy. Remember to use paper trading mode so that you can learn in a safe environment without risking real funds.