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Cryptocurrency Analysis – The Best Indicators: What are the indicators traders use to forecast crypto prices?

Cryptocurrency Analysis – The Best Indicators: What are the indicators traders use to forecast crypto prices?

Hi there! We are completely sure that when choosing an indicator for cryptocurrency analysis, you have a lot of questions. This article will help you choose the best indicator and understand how it works. In fact, everything is really simple and you`ll see that soon.

Cryptocurrency analysis – the best indicators

Cryptocurrency Analysis – The Best Indicators

Introduction

First of all, you need to know that crypto trading is based on the analysis of two things: the current price state and prospects of the price change (trend) of a particular trading instrument. 

The point is that the fundamental and technical factors are interrelated, but the mechanisms for influencing quotes are different. That's why the cryptocurrency analysis assumes at least two separate dimensions: 

  • the fundamental one – the main prospects of the cryptocurrency against the background of news assessment, 
  • and the technical one – through the search for patterns of changes in quotations under the influence of demand. 

For the analysis of cryptocurrency rates, algorithms are used that have long been implemented in technical analysis indicators. They have already confirmed their effectiveness in the currency and stock markets.

Okay, so now let's have a look at the best indicators according to the rating of the most popular cryptocurrency analysis tool – Good Сrypto.

Read me!

The versatility of indicators for analyzing cryptocurrencies can be available due to the use of mathematical methods for calculating readings.

The versatility of indicators for analyzing cryptocurrencies can be available due to the use of mathematical methods for calculating readings. The price of the asset understudy or information about the trading volumes are usually used as the initial data. Any crypto tool for analysis will work with the quotes of the cryptocurrency market, where the same principles of price formation are applied as on classical trading platforms.

There are also a number of features that distinguish the altcoin market from classical investment instruments. First of all, we are talking about the high volatility of digital assets rates, as well as about gaps (the presence of a tendency to form price gaps). For this reason, not every indicator that effectively predicts the direction of price movement in fiat instruments can cope with its task on cryptocurrency pairs.

That is why we decided to prepare an up-to-date list of the most effective cryptocurrency analysis tools you might use to build a profitable trading strategy today. 

Let’s get started!

Classical indicators: moving averages, oscillators, Ichimoku Cloud 

Let's just think that for the last several years the cryptocurrency market has been in a long sideways channel. So the beginning of a new trend that can hold out in the long term is still in question. But to make a profit, for example, by swing trading or day trading, less significant price movements are suitable. And to determine the beginning of such movements, you can successfully use classical indicators.

#1 – Moving averages (MA)

Moving averages (MA)
Moving Averages (MA)‘s considered to be the most popular and most commonly used. It’s a basis that a list of other indicators and strategies is built on. In this paragraph, we will learn more about the indicator.

Certainly, we’ll recall this indicator first. Moving Averages (MA)‘s considered to be the most popular and most commonly used. It’s a basis that a list of other indicators and strategies is built on. In this paragraph, we will learn more about the indicator.

In the foreign exchange market, moving averages started to be used by Richard Donche in the 1950s. You know, if many traders had known about all the benefits of the moving average, they would have started earning more much earlier.

An MA is the average price of a currency pair over a given period of time. It allows us to see the smooth movement of the market. The moving average repeats the price movement but does it more smoothly, without sharp spikes.

There are four main types of MA: 

  • simple (SMA), 
  • smoothed (SMMA), 
  • exponential (EMA), 
  • linear weighted (LWMA). 

The most common ones are the first option and the third. 

But what do we really know about them?

SMA

Moving averages (MA)
One of the MA types mentioned is SMA (Simple Moving Average) – simple curved lines on the price chart, the main task of which is to smooth out or filter fluctuations in currency pairs’ price depicted.

One of the MA types mentioned is SMA (Simple Moving Average) – simple curved lines on the price chart, the main task of which is to smooth out or filter fluctuations in currency pairs’ price depicted. The goal of the SMA is to help you determine the vector of further movement.

How is the SMA formed?

By calculating the average price over a certain period of time. The sum of the closing prices of a currency pair is divided by the number of periods under consideration.

What does SMA give?

Thanks to the SMA, you can see the general direction of movement in the recent past and predict what the next vector will be in the short term.

Short-term SMA risks

Unfortunately, such indicators are often bad at filtering "noise". Because of this, the trader's decision may be unnecessarily hasty. For instance, “noises” may arise from the appearance of unconfirmed, but sufficiently significant news that causes FOMO or FUD. This is, of course, followed by a reaction – a surge. As a result, a position may be closed or opened prematurely, followed by the loss of a significant part of the profit.

NB: Use simple moving averages only if there is a strong trend on the market. In any other case, don't take risks. 

SMA is absolutely ineffective in the moments of the flat when the price does not rise or fall. The main reason is that a large number of false signals are generated, and they are usually very difficult to ignore.

Another notable drawback of SMA is that it evaluates all data in a uniform way, regardless of whether it is old or new.

ЕМА

ЕМА
This one's fast mode reacts to current changes. The reaction of exponential moving averages to price on cryptocurrencies changes occurs only once.

Now let's speak about one more MA type: EMA. This one's fast mode reacts to current changes. The reaction of exponential moving averages to price on cryptocurrencies changes occurs only once.

How is this indicator calculated?

A certain fraction of the final closing price is added to the previous MA value. The weight given by new data over long periods is naturally lower when compared to shorter periods. 

What does it mean? 

The smaller the considered interval is (the price of an asset), the more accurate the data of real changes on the price chart is performed.

Possible risks and side effects of working with EMA

  • Increased susceptibility to false signals.
  • With the EMA, you cannot predict 100% where the market will turn.

It's up to you which of the moving average options to choose. The main thing is to study each of them in detail. It is clear that SMA can be called a lazy option, but exponential curves are more dynamic. Analyze your trading habits and style – and feel free to choose.

Well, there is one more important piece of information: the most commonly used case for MA is trend detection.

How to get started with MA?

How to get started with MA?
The first thing in your to-do list should be drawing a moving line on the price chart.
  • The first thing in your to-do list should be drawing a moving line on the price chart.
  • When you make the first point, don’t forget that the price line must cross the curve from the bottom up and stay on it. It generates a bullish signal – an uptrend.
  • Don’t forget that the strength of the trend is important in using this indicator. You can see it by the angle of the inclination price chart relative to the horizontal. That is, the smaller this angle is, the weaker the trend is – and vice versa.
  • Create an indicator combination (your own). Don't look for a perfect option, it just doesn't exist.
  • Use short curves to trade short-term trends and long MAs for long-term trading.

Now let's sum up the first indicator – MA. It is one of the most popular indicators among traders and the simplest. MA also provides a more aggregated view on data that can help a trader to make a decision about future trends. 

#2 – Oscillators (SO)

The next most popular technical indicator is the Stochastic Oscillator. SO compares the closing price to date against the price range over the time period that a trader has chosen. The indicator is a graph with two lines: %K (solid line – highlighted in green and red in the picture) and %D (dashed line – highlighted in black).

#2 – Oscillators (SO)
The next most popular technical indicator is the Stochastic Oscillator. SO compares the closing price to date against the price range over the time period that a trader has chosen.

SO interpretation options

  1. First of all, you should buy a crypto asset when the oscillator falls below a certain level and then rises above it.
  2. When the solid line rises above the second line, make a purchase. But if it is below the dashed line, then make a sale.
  3. Remember to watch for discrepancies.

How does this indicator work?

  1. The indicator uses four variables. SO calculation would be impossible without it. 
  2. Smoothing moments with solid lines:
  • а) %K is a value, the main role of which is to determine the level of internal smoothness of the line.
  • b) Dashed line periods are the number of unit periods that are used to calculate %K.
  • c) %D is the anti-aliasing method used when calculating the dashed line.

There is a special formula for calculating the Solid line:

Formula

%K = (CLOSE - MIN (LOW (%K))) / (MAX (HIGH (%K)) - MIN (LOW (%K))) * 100

Decoding:

CLOSE

closing price (current)

MIN (LOW (%K))

minimum for the number of solid line periods

MAX (HIGH (%K))

maximum for the number of periods of solid line

There is a special formula for calculating the Dashed line:

Formula

%D = SMA (%K, N)

Decoding: 

N

smoothing moment

SMA

simple moving average

#3 – Ichimoku Clouds (IC)

Ichimoku Cloud, also called Ichimoku Kinko Hyo, is a popular and flexible indicator that helps:

 #3 – Ichimoku Clouds (IC)
Ichimoku Cloud, also called Ichimoku Kinko Hyo, is a popular and flexible indicator that helps
  • determine the levels of support and resistance;
  • set the direction of the trend;
  • measure the pace;
  • create trading signals to ensure the highest security.

The Ichimoku cloud indicator gives a more transparent and more visual picture of price movements. These signals help traders find the best entry and exit points. It is a crypto tool with five lines, each of them displays data based on leading and lagging indicators. When two lines intersect, the area between them shades like a cloud.

Remember: if the price is above the cloud, then the trend is growing up, and when the price is below the pattern, it's going down. If the cloud is moving in the direction of the cost, then the design should be considered as reliable.
Sounds simple, right? :)


But the most difficult part is to select the entry or exit point for your trade. 

How does this indicator work?

How does this indicator work?
You can notice 5 lines that represent important data for a trader on the Ichimoku Cloud chart.

You can notice 5 lines that represent important data for a trader on the Ichimoku Cloud chart. The information that is shown on the chart is collected on the basis of leading and lagging indicators.

The lines that make up the chart: reversal line, standard, moving average – Senkou Span A (SSA), daily moving average – Senkou Span B (SSB), the closing sum of today's price – Chikou Span (CS). 

  • The first line is a 9-day moving average, 
  • the second and third are a 26-day MA, 
  • the fourth is a 52-day MA (with a forecast for future 26-day periods), 
  • the fifth line is based on the past 26-day period.

The space between Senkou A (3) and Senkou B (4) is called the cloud (Kumo), which is the most visible element of the Ichimoku system. The two lines predict the future of the 26-day period, and as such, are considered the leading indicators, while the Chikou Span (5) is a lagging indicator and provides data based on the past 26-day period.

The clouds are highlighted in green and red for easier reading. A green cloud is created when Senkou A is higher than Senkou B (the lower line of the red cloud), the red cloud is derived from the opposite interaction of the same lines.

So how to analyze the price chart by Ichimoku Cloud?

With its many elements, the Ichimoku Cloud generates different types of signals. We can divide them into signals for determining the direction of the momentum and signals for following a trend. 

The signals to determine the direction of the momentum are generated according to the market price and crossings of the standard line and the reversal line. 

A bullish momentum signal is generated when one or both lines move above the standard line. A bearish momentum signal is exactly the opposite when one or both lines move below the standard line.

Trend following signals are generated according to the color of the cloud and the position of the market price. As mentioned, the color of the clouds reflects the difference between Senkou span A and B.

When the price is consistently above the cloud, there is a higher likelihood that the asset is in an uptrend. In turn, if the price moves below it, this can be interpreted as a bearish signal indicating a downtrend. 

Except for some factors, the trend can change to flat when the price moves sideways inside the cloud.

Cryptocurrency analysis – the best indicators: summary

Cryptocurrency analysis – the best indicators: summary
After analyzing indicators for analyzing cryptocurrencies, one main conclusion can be drawn: the trader definitely needs crypto instruments.

After analyzing indicators for analyzing cryptocurrencies, one main conclusion can be drawn: the trader definitely needs crypto instruments. Before you decide to invest your funds in a specific project, it is better to look at the indicators which contain all the necessary information. You can use them together and that will help you find the best solution. 

And, please, never forget that no analytics can help to predict 100% real profit! It just means that when you buy the cryptocurrency, you are making a more deliberate decision with crypto tools than without. 

Well, now you are more aware of the best tools for analyzing cryptocurrency and you can make your choice deliberately. So just do it and enjoy your progress! Good luck! 

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September 23, 2020

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