How to Use Indicators in Crypto Trading

Indicators serve an important function for every type of trader, including currencies, commodities, and equities. These metrics allow investors and traders to make smart, informed decisions in a volatile market. There are certain moves a trader can make to increase their investment’s value, but you’ll need to know where to look in order to make those moves.

The best crypto traders keep a close eye on certain indicators within the commodity channel index. Here’s what the most important indicators mean for tracking your crypto investment.

What is the Commodity Channel Index?

The commodity channel index is a popular indicator used for identifying trends, especially those that are cyclical. The commodity channel index illustrates equities, currencies, and commodities. As a result, this is an excellent index for crypto traders to keep an eye on. The commodity channel index is adjustable depending on the timeline of the market, and it shows changes over a given period. The index considers multiple indicators in devising its simple moving average. While there are specific indicators crypto traders should track, the learning to read the commodity channel index is an invaluable tool for every investor. In most cases, investors and traders use this tool to identify events like price extremes, the strength of a trend, and price reversals.

What are Indicators?

Indicators are metrics traders use to understand the health of the market. These metrics are used to predict behavior patterns over time, especially in terms of share value. Smart investors use indicators to understand and act on pattern predictions. This, in turn, guarantees a better return on investment in the market.

However, crypto traders may find indicators harder to use. Cryptocurrency markets are notoriously volatile and difficult to predict. Crypto traders can develop certain skills, like commodity channel index reading and market tracking, to develop a trading style and understanding of the crypto market.

Key Price Indicators Every Crypto Trader Should Know

Certain indicators are more relevant to crypto trading than others. While some traders will find some indicators more useful than others, these metrics will be helpful regardless of your crypto experience.

Relative Strength Index (RSI)

The relative strength index indicates whether an asset – a currency, equity, or commodity – is oversold, overbought, and/or overvalued. This indicator is used to understand whether a price has bullish or bearish momentum. As a point of reference, an RSI of 70% indicates that a cryptocurrency is overbought, and an RSI of under 30% indicates that it is oversold. Using the RSI can help investors understand whether buyers or sellers are in control of a market.

Moving Averages

A moving average is an extremely straightforward metric for understanding a currency’s strength. The moving average (MA) is the average price over a predetermined period. In most cases, 200-day, 50-day, and 20-day averages are the standard measurements. This indicator is used to understand upward and downward trends. The 200-day moving average is often the most reliable indicator of a currency’s value. This MA is often tied to the labor market, and it affects everything from a business’s starting salary and bonuses to whether they hire W2 or 1099 workers. However, the shorter windows have their own insights. For example, the 50-day simple moving average is popular amongst technical traders because it is considered the first indicator of an upward trend. Additionally, the 20-day simple moving average can illustrate a more volatile currency or commodity. As a result, the 20-day MA is very popular within crypto communities.

Bollinger Bands (BB)

Bollinger bands are used to measure market volatility. This is a good indicator of whether a market is overbought and whether a currency is overvalued. Bollinger bands consist of three lines, which help an investor understand volatility. The middle band is the simple moving average of a stock or currency, while the upper and lower bands represent two standard deviations away from that simple moving average. As volatility in a currency increases, so does the distance between the bands.

Moving Average Convergence Divergence (MACD)

The moving average convergence divergence, known colloquially as MACD, is an indicator of a trend’s momentum. To get this indicator, traders subtract the 26-period estimated moving average from the 12-period estimated moving average, then measure the difference. This creates a signal line, which can be used to understand if and when a trend’s momentum increases or decreases.

Developing Your Crypto Trading Strategy

Each investor has a unique approach to cryptocurrency trading. Understanding certain indicators can help a new trader develop their own style. Whether you’ve invested in Bitcoin or Ethereum, Cardano or Litecoin, there are certain moves you can make to maximize your return on investment. Learning to use the relative strength index, the simple moving average, Bollinger bands, and the moving average convergence divergence is an invaluable skill for every crypto trader.