Cryptocurrency trading has evolved from the perception of simply being a game of chance to a strategic process. Successful traders rely on a combination of technical analysis, specific indicators and metrics to find trades with a high probability of profit.
Before explaining the three technical analysis strategies that can help confirm a winning trade, let’s first define the key terms:
- Technical analysis — is all about analyzing statistical trends, so as long as an asset has historical data, technical analysis can be applied. Technical analysis involves looking at the past trading activity and price variations of a crypto asset, with the goal of understanding how the supply and demand of a specific asset might influence its future price changes. By using charts to evaluate price trends and patterns, it’s often been possible to find profitable trading opportunities.
- Indicator — is a tool that helps traders make decisions in the market. Select indicators on cryptocurrency market charts are used to measure different aspects of market activity. Ultimately, traders use them to try and predict potential future price movements.
The three indicators for crypto trading examined here are:
- Relative strength index
- Bollinger Bands
- Moving average convergence/divergence
The key distinction lies in the strategy used to apply what these indicators point to in the market. Below are some best practices on how to use them.
Relative Strength Index
The relative strength index (RSI) measures momentum — whether an asset is overbought or oversold. It does that by comparing the closing price with the asset’s 50-day moving average.
If the current price of an asset is within 10% of its 50-day moving average and has been trending upward for at least two days, the RSI reading is considered to be above 70, which qualifies as overbought; on the other hand, an RSI reading under 30 is thought to be oversold.
A strong upward RSI momentum tends to point to an impending rally.
Look specifically for this type of RSI divergence: two lows, where the first low is higher than the next low, followed by an RSI where a lower low is followed by a higher low. Such a divergence signifies a potential change in momentum, meaning that a sizable upside could be happening soon.
Bollinger Bands
Bollinger Bands can be used to determine an asset’s relative high and low price over a set period by using a common statistics metric known as standard deviation.
By plotting bands two deviations above and two…
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