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When it comes to the best indicators for crypto trading and investing, there is no one-size-fits-all solution.
The best crypto indicators that suit your needs will vary based on your trading and investment preferences. So, whether you are a day trader, a swing trader, or a long-term investor, we have compiled a list of the top ten indicators used by experts in cryptocurrency technical analysis.
What are the best indicators for crypto trading and investing? Let’s find out.
Key Takeaways
- The crypto indicators that suit your needs best vary based on your trading and investment preferences.
- There are three main types of crypto trading indicators: leading, lagging, and onchain indicators.
- The relative strength index indicates when a market is overbought or oversold.
- Traders use Fibonacci Retracement to identify support and resistance levels.
- Transparent property of crypto blockchains has introduced a new set of crypto-exclusive indicators.
How to Choose the Best Crypto Indicator for You
First, here is a primer on technical analysis.
Technical analysis refers to the study of market data, such as historical price movements and trade volume, to identify entry and exit points.
By analyzing market data, traders aim to predict crypto price movement, identify trend reversals, and gauge investor sentiment driving market moves.
Indicators used in cryptocurrency technical analysis are categorized into the following types:
If you are a beginner, learning how to read crypto charts is the first step to conducting your own technical analysis.
Let’s see what the best crypto charts look like and help you choose your favorite indicators.
Top 10 Best Crypto Indicators for Trading & Investing
The first seven technical indicators listed below are popular indicators used by traders and investors in traditional finance markets such as stock, forex and commodities. These indicators are used by crypto traders as well.
The last three indicators on this list are crypto-exclusive onchain metrics.
1. Moving Averages
Moving averages are indicators that calculate the moving average price of a cryptocurrency or index. There are two types of moving averages – simple moving average (SMA) and exponential moving average (EMA).
SMA calculates the arithmetic mean of a given set of prices, while EMA calculates the weighted average mean. Experts state that EMA reacts more quickly to changing prices than SMA.
SMA and EMA are used for short-term trading and long-term investing. These metrics are used to identify bullish or bearish trends.
2. Relative strength index (RSI)
Relative strength index is a leading indicator in crypto technical analysis as it can indicate that a market is overbought or oversold and may soon reverse.
RSI readings extend from 0 to 100. RSI values above 70 indicate that an asset is overbought, while RSI values below 30 signal that an asset is in an oversold zone.
3. Fibonacci Retracements
Fibonacci Retracement helps traders identify possible support and resistance levels of an asset. Traders use support and resistance levels to identify potential buy or sell orders.
A support level is the price that an asset has not fallen below for a significant period of time. Traders tend to buy assets at support levels.
A resistance level is the price that an asset has repeatedly failed to cross. Cryptocurrencies trading at resistance levels may face increased selling pressure.
4. Bollinger Bands
Bollinger Bands appear on price charts as three lines. The middle line indicates the asset’s 20-day SMA. The upper and lower lines are plotted at a standard deviation above and below the 20-day SMA line.
The outer bands expand as the asset becomes more volatile and contracts during periods of low volatility.
Traders use Bollinger bands to identify potential entry and exit points based on market trends. When the middle line is closer to the upper line, it suggests an uptrend.
According to Fidelity Investments, Bollinger Bands are not intended to be used on its own.
5. Moving Average Convergence Divergence (MACD)
The moving average convergence and divergence indicator is a momentum oscillator like the RSI. However, MACD is not used to identify overbought or oversold zones. Instead, MACD is used to identify price trends and measure trend momentum, both of which allow traders to time their bets.
The MACD oscillates above and below a zero line. When the MACD crosses above zero, it signals a bullish trend for the underlying asset. When MACD goes below the zero line, it signals a bearish trend for the underlying asset.
MACD also helps indicate volatile trading sessions when it seesaws back and forth across the zero line. Traders who use MACD may choose to avoid trading during such sessions to reduce impact from volatility.
6. On-Balance Volume (OBV)
On-balance volume is a technical indicator that analyzes trade volume to predict change in asset prices.
OBV is calculated by adding volume on positive days and subtracting volume on negative days. According to Fidelity Investment, the direction of the OBV is more important than its actual value.
If the price of the underlying asset and its OBV keep making higher peaks and lower troughs, the ongoing uptrend is likely to continue. A divergence between the asset price and OBV movement could signal that the ongoing trend will come to a halt.
On the same note, if the price of the underlying asset and its OBV are making lower peaks and lower troughs, it indicates that the downtrend could extend further.
7. Stochastics
Stochastics refers to a group of oscillator indicators, like the aforementioned RSI and MACD. Stochastics are used by traders to identify buying and selling opportunities based on momentum.
Stochastics are made up of 2 lines that move in tandem with one another. The lines oscillate within a range of 0 to 100.
When the stochastic value is above the 80 range, it signals an overbought asset, which could prompt investors to sell.
When the stochastic value falls below 20, traders read this as a buy signal, as the asset is said to be in an oversold zone.
8. Short-Term Holders & Long-Term Holders
The first onchain metric that we will talk about is short-term holders and long-term holders.
The transparency of crypto blockchains allows us to monitor the holdings of crypto wallets in real time. Thus, we can use this to our advantage to monitor the behavior of crypto investors during various stages of a market cycle and to identify market tops and bottoms.
According to crypto research firm Glassnode, the predominant presence of long-term holders can point to an accumulation phase in the market characterized by “strong investor conviction.”
When long-term holders start selling, it can indicate market tops, and these high-conviction investors start taking profits.
Traders and investors can study the behaviors of long and short-term holders to time their short and long positions.
9. Profit & Loss Indicators
Public blockchains also allow us to see which wallets are currently holding tokens at a profit or loss.
According to Glassnode, traders can use onchain indicators such as realized profit/loss, net unrealized profit/loss, and spent output profit ratio (SOPR) to analyze market trends and identify entry and exit points.
For example, significant increases in realized profits can signal excessive profit-taking and lead to market tops. Glassnode said:
“When profit and loss metrics return to neutral and SOPR returns to one, it suggests that the market is in an uptrend, with investors buying at their cost basis and those in profit not selling, indicating market stability. An undercut in these metrics can serve as a contrarian indicator, signaling a potential buying opportunity as it reflects panic selling by those who bought at the local peak.”
10. CEX Inflow & Outflow Volume
Traders and investors can analyze the volume of crypto flowing in and out of centralized exchanges (CEX) to study investor behavior and identify trends.
CEX allows crypto investors to convert cryptocurrencies into fiat and vice versa. Therefore, the volume of crypto flowing in and out of CEXs can indicate bearish or bullish trends.
For example, when more cryptocurrencies are being withdrawn from CEXs into self-custodial wallets, the trend could indicate investor conviction in the market. Crypto investors prefer to hold tokens on self-custodial wallets to reduce exchange risks such as bankruptcies and fraud.
On the contrary, when the flow of crypto to CEXs increases, the trend could indicate the market is turning bearish as investors look to convert their crypto to fiat.
The Bottom Line
No indicator is superior or inferior to one another. Your choice of the best crypto trading indicators to use depends on your trading strategy, risk tolerance, and understanding. More importantly, most indicators can be used in conjunction with one another.
Keep in mind that indicators can be wrong, resulting in false alarms and missed opportunities. If you learn how to use them well, these crypto trading and investing indicators will serve as your “North Star” and help you navigate through the unpredictable cryptocurrency markets.
FAQs
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References
- What Are Bollinger Bands? – Fidelity?(Fidelity)
- What Is OBV? – On Balance Volume – Fidelity?(Fidelity)
- Optimizing Discretionary Trading with On-Chain Data?(20368641.fs1.hubspotusercontent-na1)
