Crypto market forecasting with indicators
By Paul Reid
08 February 2023
The crypto market is showing signs of life, and 2023 might just be a great time to trade your favorite coins. But before the market gets into full swing, why not brush up on the best indicators for crypto market technical analysis?
The below indicators are commonly available on most crypto trading platforms and crypto trading apps. Stay for the final words in this article to get the most out of your crypto trading this year. Let’s get started with the first indicator on the list—and it’s a big deal.
Bollinger Bands aim to show how crypto market prices are spread around an average value. They are defined by two trendlines (one negative, one positive) plotted at a distance of two standard deviations from a simple moving average (SMA). These bands can indicate support and resistance levels.
The standard deviation measures crypto market volatility by comparing prices to the average (SMA). Bollinger Bands usually uses a 20-day period and two standard deviations for the lower and upper bands, but the settings can be adjusted.
When prices approach the upper band, it signals an overbought crypto market as the price grows abnormally. If the price drops toward the lower band, it's considered oversold. The bands' contraction or expansion shows the market's volatility level.
Combining with the Moving Average Convergence/Divergence (MACD) indicator is a helpful method that provides trading signals. When the MACD line crosses above zero, it signals a bullish trend and is a good entry point. When it crosses below zero, it indicates a bearish trend and is a good exit point.
The Ichimoku Cloud consists of five lines – the Tenkan-sen, Kijun-sen, Chikou Span, Senkou Span A, and Senkou Span B. These lines are plotted on the chart using historical price data.
The cloud formed by the two Senkou Span lines acts as a dynamic support or resistance level. If the crypto asset price is above the cloud, it indicates an uptrend, and if the price is below the cloud, it indicates a downtrend.
Use the Tenkan-sen and Kijun-sen lines as momentum indicators when forecasting the crypto markets: The Tenkan-sen line represents short-term momentum and the Kijun-sen line represents longer-term momentum. If the Tenkan-sen line is above the Kijun-sen line, it signals bullish momentum, and if it is below the Kijun-sen line, it signals bearish momentum.
Use the Chikou Span as a lagging indicator: The Chikou Span is plotted 26 periods behind the current price and acts as a lagging indicator. When the Chikou Span is above the price, it signals bullish sentiment forming in the crypto market, and when it is below the price, it signals bearish sentiment.
Fibonacci retracement levels are useful tools for traders to identify potential turning points in crypto prices. They are horizontal lines at levels of 23.6%, 38.2%, 61.8%, and 78.6% derived from Fibonacci's sequence.
Traders can use these levels to determine support and resistance points in a price chart. For instance, if the price bounces off a Fibonacci support level during an uptrend, it may be a good entry point. A resistance level can be an exit point when a trader takes profit and closes a trade in anticipation of a reversal.
An established breakout on support or resistance can also serve as a good entry point when bitcoin trading (and most other high market cap coins) in the direction of the trend, as the broken support becomes resistance and vice versa.
Relative Strength Index (RSI)
The RSI is a momentum indicator that measures the speed and magnitude of crypto price changes by evaluating oversold and overbought conditions.
The RSI formula ranges from 0 to 100, and an asset is considered oversold below 30 and overbought above 70. During sustained crypto trends, the indicator may remain in overbought or oversold territory for extended periods.
The RSI indicator on the chart is signified by a line moving between two parallel lines and can indicate divergence signals for bullish or bearish market conditions or for an exaggerated divergence.
Moving Averages (MA)
MA is a commonly used tool for Bitcoin trading and crypto market forecasting in general as a lagging indicator. The Moving Average Method shows the average price of a given number of recent candles and helps smooth out price action over a set period of time.
As a crypto trader, you can adjust the number of periods you want to consider in the moving average indicator. One period represents a unit of time, based on the chart's observed time frame.
The choice of MA periods depends on your trading style, with popular options being the 20-period, 50-period, and 200-period time frames. This allows traders to determine the general direction of the crypto asset based on the data set over time.
Crypto daytraders often prefer the 20-period MA due to its shorter time frame, while long-term coin holders may prefer the 200-period MA for better monitoring of crypto market trend identification. Regardless, MA provides a good indication of support and resistance levels.
Stochastic Oscillator (SO)
Stochastic Oscillator is a leading indicator used to determine the momentum strength of a crypto market trend. It compares the asset's closing price with its high-low range over a set period and performs well even in the volatile cryptocurrency market. The speed of its reaction can be adjusted.
The Stochastic Oscillator ranges between 0 and 100, with values below 20 indicating oversold, and values above 80 indicating an overbought crypto market. During a strong crypto market trend formation, oversold or overbought conditions may only lead to consolidation in sideways price movement. The crossing of the %K line to the %D line signals an incoming upward trend, as the intersection implies a significant day-to-day momentum shift.
The last piece of the puzzle
Using indicators to forecast the crypto market is a lot like forecasting the weather. Forecasting models and signals can give you a rough idea of what to expect on the day, but conditions can change hour by hour, and during those temporary fluctuations, your trading account can suffer.
Indicators give a big-picture forecast, but rarely predict the rapid moves that commonly occur after fundamentals or news reports. When a mainstream media giant goes hawkish, many trading news sites blindly follow, and a sentiment trend forms among crypto traders everywhere… usually within a single day.
Indicators cannot plot sentiment shifts, so it’s recommended to include fundamental analysis for your entry points, and use technical indicators to help identify exit points. Indicators are also ideal for plotting Take Profit & Stop Loss settings, and analyzing the price range so you can set leverage at appropriate levels. If the 24-hour range is a little wild, high leverage will present a serious risk to your equity, so be modest with your profit targets when trading any of the cryptocurrencies.
This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.
Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.
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