To get an idea of which technical indicators financial analysts believe are the most effective for bitcoin trading, we asked a number of of them for opinions.
The analysts we queried provide a range of responses. Though they mention many different indicators they use, several respondents emphasize the benefits of keeping technical analysis simple.
Here are some of the key bitcoin technical analysis takeaways from our panel of analysts.
Simple Moving Averages (SMA)
Several analysts mention the use of moving averages, which help smooth out the price fluctuations of securities and give traders a better sense of their direction. Joe Lee, co-founder of Magnr, emphasizes the value of these indicators, saying:
“My [favorite] technical indicators were always moving averages. A moving average takes short term volatility out of the equation such that you are not trading against pure speculators.”
By leveraging these averages, you can help identify price trends and use those trends to turn a profit. For example, by calculating bitcoin’s five-day simple moving average (SMA), which is just the digital currency’s average price during that period, you can then compare that figure with bitcoin’s 10-day SMA in order to evaluate potential trends.
Should the digital currency’s five-day SMA, for example, surpass (or cross over) its 10-day SMA, this development points to bullish momentum in the market. In other words, this kind of crossover would show that bitcoin’s price is rising.
If this trend continues, you could potentially generate compelling returns by buying in. However, bitcoin markets are volatile, and it can be quite helpful to have confirmation that the trend is indeed bullish before you purchase the digital currency.
Longer-Term Moving Averages
One good way to confirm a bullish trend in a situation like this is to wait and see whether there is a longer-term crossover. If the 10-day SMA also exceeds the 20-day SMA, this crossover helps provide additional confirmation that the market’s momentum is bullish.
To put it simply, having a second, longer-term crossover like this helps reaffirm that price is rising, notes Charles Hayter, co-founder and CEO of digital currency platform CryptoCompare. Taken together, the two crossovers represent a stronger indicator of bullish momentum.
Moving Average Convergence Divergence (MACD)
For additional confirmation, a trader could harness a slightly more complex technical indicator called the Moving Average Convergence Divergence (MACD), Hayter offers. The MACD is a momentum oscillator that incorporates multiple moving averages to identify bullish and bearish trends.
Making use of this technical indicator requires first calculating the Exponential Moving Average (EMA), which is similar to the SMA but gives greater weight to the most recent price data. Making this adjustment helps reduce the lag associated with relying on moving averages.
For example, calculating bitcoin’s 12-day EMA would involve gathering price data for all sessions during that time frame and then determining how much weight the final day’s price information should have relative to those of the other sessions.
To determine bitcoin’s MACD, you could use the aforementioned methodology to calculate the digital currency’s 26-day EMA and then subtract that from its 12-day EMA. (Trading software can do this for you as well.)
The MACD provides a “mathematical opinion” of whether a particular asset is either overbought or oversold, says Lee. He adds that security prices always go through cycles, and will inevitably experience these two states.
Relative Strength Index (RSI)
If you want to use technical indicators to get a better sense of whether bitcoin is overbought or oversold, you may might consider looking into the Relative Strength Index (RSI), which measures the size of a security’s recent price movements to get a better sense of whether it is trending upward or downward.
By identifying when bitcoin is overbought, you can pinpoint opportunities to take profits and avoid overpaying for the digital currency.
Figuring out when bitcoin is underbought, on the other hand, can provide appealing opportunities to purchase the currency. By singling out these opportunities, you can potentially generate compelling returns.
Certain technical indicators, for example the MACD and RSI, are lagging indicators, meaning that they trail the price of an asset like bitcoin. Because these indicators follow the price of the security being studied, they may not provide the information you need to make a successful trade until a trend has ended.
Price is Paramount
As a result, some traders believe that price is the best indicator. Petar Zivkovski, COO of leveraged digital currency trading platform Whaleclub, is in this particular camp. He observes:
“I’ve found after years of trading [manually] that the best indicator is price itself.”
Zivkovski emphasizes that lagging indicators do not always provide the same value. He says:
“Technical indicators such as MACD and RSI are functions of price, so they are delayed relative to price by definition. So any information you get from them will be slower than what you can get from price itself.”
To use technical analysis effectively, you must understand trader psychology and the impact it has on the securities markets. Assets, for example stocks and bonds, always follow cycles that include booms and busts.
In this particular case, Zivkovski asserts that technical analysis is effective because many traders are using it. He notes:
“Technical analysis is a psychological tool and works because other traders use it too … The simpler the tools you use, the more players in the market are using those too, and the more likely they are to succeed.”
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