3 Technical Indicators Every Cryptocurrency Trader Should Know
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Technical Analysis is a popular strategy that is used by experienced cryptocurrency traders.
It forecasts future prices from the study of past price movements and trends. This article will show the basics of the art and science of Technical Analysis (7).
Technical analysis operates with 3 key underlying assumptions:
- The market discounts everything
- Prices move in trends
- History tends to repeat itself (2)
Technical Analysis uses charts to illustrate historical price data.
On basic cryptocurrency charts the price of the coin is shown over a certain period of time. The bottom of most charts also show daily trading activity symbolized with volume bars. There is an entire art on how to interpret technical indicators and patterns (1).
Here are 3 technical indicators that every cryptocurrency trader should know:
1) Simple Moving Average (SMA)
The Simple Moving Average (SMA) shows the historical price of a coin with a simple line. It is one of the most commonly used technical indicators. It simply shows the price trends of a coin, and it is useful to identify a trend in price (6).The typical time intervals used for the SMA are:
- 10 days
- 15 days
- 50 days
- 100 days
- 200 days
2) Relative Strength Index (RSI)
The Relative Strength Index measures the momentum of a coin price. It measures the strength of directional price movements with both uptrends and downtrends.
The RSI assigns a value to a coin from 0 to 100
- When the value is below 30 the coin is considered to be oversold
- When the value is over 70 it’s typically considered to be overbought
If the value of the coin is at 50 there isn’t a trend in momentum
On March 29th, 2018, Litecoin’s RSI hit a low of approximately 26. The price of the coin also hit a low of approximately $112.00. In this particular case the coin was oversold and as a result proceeded to rise in both price and RSI value over the next few days (4).
*Chart courtesy of tradingview.com (3)
3) Bollinger Bands
Bollinger Bands are a technical trading indicator created by John Bollinger in the early 1980s. They provide a relative definition of a price high and low for coins.
The coin prices are considered high at the upper band and low at the lower band. When the price falls outside of the Bollinger Bands this will typically indicate a developing new price trend.
- Bollinger Bands are a set of three curves drawn in relation to recent coin prices.
- The middle band is a measure of the intermediate-term trend
- The intervals between the upper and lower bands and the middle band are determined by price volatility
- The larger the band the higher the price volatility (3).
When Ethereum reached it’s record high in January of 2018, the price started trading outside of the Bollinger Bands on January 2nd and consistently did each day, with the exception of the two days preceding its all-time high on January 13th. Once the price hit the record high it began to fall in value and remained mostly within the bands (4).
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