While traditional financial markets are expected to experience another sell-off, it seems as if cryptocurrencies are recovering. Is it a good time to buy?
You could ask Google and then you’d find videos, tweets and several crypto outlets telling you either yes or no, and if yes, which coin to buy. Someone is always advocating to buy, even when markets are deep in the red. So that might not be the most reliable resource.
While traders rely on news and information surrounding legislation, financial markets and security breaches they also make use of technical analysis to define when to enter and exit a trade.
In this blog post, we are going to cover three indicators you can use to decide if you want to enter a trade and when it might be better to sell.
And just in case you haven’t ever used indicators on our exchange before, you can easily add in indicators by going into the top left of the price chart and click on indicators. You can then search for any indicator you want to add. If you don’t like the default colours or want to change something about the indicator itself, click on the small settings icon next to the indicator and let your creativity flow.
Moving averages (MAs) are quite frankly, easy to understand. Especially simple moving averages. It is nothing but a line that indicates the average price of a cryptocurrency over a certain time period. The simple moving average is calculated by adding up the prices over a period of time and then dividing them by that time frame. If an asset was $1, $4,$3, $4,$5 on 5 days the moving average would be ($1 + $4 +$3 + $4 + $5)/ 5. In doing so, SMAs remove volatility and let you see trends. The most frequently used SMAs are the 50 days, 100 days and 100 days MAs.
The 50 days MA lets you see a short term trend. It will include more swings than a longer SMAs and follows price action closer. It is sensitive enough to show large institutional sell-offs and buys. Usually when the price action happens above the 50 days MA the market sentiment is bullish, while prices moving below the 50 days MA are seen as bearish.
With the 100 days moving averages trends triggered by larger events such as the introduction of new legislation or political sentiment are calculated in
And the 200 days moving average shows the price trend from a birds perspective, far from what’s currently happening in the markets. As it doesn’t take daily price action into account, it is less useful for traders trading on a short term basis.
To identify trend reversals you can use 2 different MAs at the same time, for instance when looking at a shorter time frame, you could draw in the 20 and 50 days MA. Look out for points where they cross. Traders differentiate between the Golden Cross and the Death Cross. When the short term MA crosses above the long term MA this is seen as a strong buy signal and a good entry point for a trade. The opposite is true for the Death Cross where the short term MA moves below the long term MA indicating that the bears are back.
Exponential Moving Averages
Are you also among the people who’ve spent more time than ever looking at exponential graphs these days? If yes, you might find some comfort in this tweet by Michael Reuters who posted this image.
For the exponential MA, it is sufficient to understand that unlike the simple MA more recent prices are weighted higher, which makes it more sensitive to recent changes.
Like any indicator Moving Averages alone should not be informing your trading decisions. Be careful to not fall for bull traps, where traders end up buying a local top because the MAs indicated a breakout. When MAs indicate a breakout, also look out for other indicators such as increased trading volume or bullish candlesticks.
The Parabolic SAR was developed by the American Mechanical engineer J. Welles Wilder Jr. who also gave us the SRI. It makes use of a trailing stop and reverse method hence the acronym SAR. The math behind is pretty complicated and goes above what we need to understand to make use of this indicator. Unlike other indicators, the SAR is shown as a series of dots on the charts. Polka dots lovers unite.
The position of the dots informs traders about ongoing trends. A dot below the price is a bullish signal representing a price trend upwards while dots above the price are a sign to sell because prices are likely to move down.
The SAR can also help identify where a trend ends for example when dots flip. While the SAR works generally well to capture profits or set stop-loss orders, it doesn’t produce reliable signals in markets that are moving sideways.
It’s best used in combination with moving averages. Sell signals from the SAR are a lot more convincing when prices are also trading under the long-term moving average.
One thing worth mentioning is that you can increase or decrease the sensitivity of the SAR so that frequent changes are weighted even higher. However, be careful as the higher the sensitivity, the more likely it’ll produce false signals.
The third and last indicator we will introduce in this article are Bollinger bands. They were created by John Bollinger who explained them as a type of trading band or envelope.
If you ever took statistics classes, you might have heard of standard deviation. If not, don’t worry, for our purpose standard deviation simply describes how much prices differ from the average price.
The Bollinger bands consist of 3 bands of which the middle band is the moving average, by default the 20 days MA. The upper band is a line following the middle band plus 2 standard deviations while the lower band represents the middle band minus 2 standard deviations. When prices move closer to the upper band they are considered “expensive” while prices closer to the lower band are “cheap”.
The bands widen or contract depending on the volatility of the market. Look out for phases of low volatility, because usually they are followed by a breakout. To define in which direction the breakout will happen, take the overall trend into account.
There is one specific pattern you’ll want to look out for, the so-called Bollinger bounce. It describes when the price reaches the top or bottom of the bands and then bounces back. Bollinger bands can act as dynamic support and resistance. In an uptrend, the price should not touch the lower band. If it does, this could be an indication of an upcoming reversal and vice versa.
To summarize, you’ve now learned about moving averages, parabolic SAR and Bollinger bands. Feel free to head over to the exchange and draw in all kinds of indicators turning the chart into your Canvas, playing around with different length MAs and sensitivity for the SAR. That’s the best way to familiarize yourself with them.
Last but not least, don’t forget that cryptocurrencies can be unpredictable, whales can ruin any trend and always do your own research. With that being said “Happy Trading!”.