Bitcoin traders use many different technical indicators in their trading strategies. Of the various technical indicators used in these strategies, financial analysts all use a select few due to the high level of accuracy and reliability they offer.
Most of the expert financial analysts that provide information regarding bitcoin technical indicators recommend keeping the technical analysis simple, allowing bitcoin investment strategy to remain dynamic and agile.
Top Bitcoin Investment Trading Technical Indicators
With this in mind, we’ll present some of the simplest and most effective Bitcoin technical analysis techniques recommended by leading financial analysts.
Simple Moving Averages
Calculating the simple moving average, or SMA of a currency is one of the simplest and most accurate technical indicators used by Bitcoin investors in their investment strategies. Simple moving averages are able to smooth out the frequent shifts and fluctuations in the prices of securities and provide traders with a broader sense of their movement.
Some of the foremost experts in securities investment recommend simple moving averages. Joe Lee, the co founder of Magnr, has stated that simple moving averages are his favorite form of technical indicator due to their ability to eliminate short term volatility from the equation and assist traders in avoiding making purely speculative trading decisions.
By using simple moving averages to remove some of the noise surrounding the price of a currency, it’s possible to identify key price trends. These trends can then be leveraged or exploited to turn an impressive profit. Using Bitcoin as an example, it’s possible to calculate the 5-day simple moving average of the currency by averaging out the daily price of the currency for that period.
Comparing the 5-day simple moving average of Bitcoin and then comparing it to the SMA for a longer period, such as a 10-day simple moving average, can provide a significant amount of insight into potential pricing trends.
Understanding the information provided by SMA assessment is critical in any Bitcoin investment strategy. If the 5-day SMA price of Bitcoin is higher than the 10-day SMA of the currency, then it’s likely that Bitcoin is experiencing an upward trend. Inversely, if the 5-day simple moving average of Bitcoin is lower than that of the 10-day simple moving average, the currency is likely entering a downtrend.
If, after calculating the simple moving average of Bitcoin over a given period, the market is presenting an upward trend, then it’s likely an opportunity to generate a significant amount of profit by buying in. The volatile and dynamic nature of the Bitcoin market, however, can make it difficult to make solid investment decisions based on one indicator alone, so it’s helpful to observe several indicators in order to confirm that the market is indeed following an upward trend.
Long Term Moving Averages
A powerful analytical tool that can be used to confirm a bullish trend that has been identified with simple moving average calculation is to wait a little longer and confirm whether there is a sustainable long-term crossover in price behavior. Performing 10-day simple moving average calculation and comparing it to 20-day simple moving average calculations can help to provide secondary confirmation that the market is is exhibiting a bullish momentum.
Charles Hayter, the CEO and co-founder of CryptoCompare, a leading digital currency platform, recommends reaffirming that the price of a currency is rising with both short and longer term simple moving average calculation. If both of these SMA calculations exhibit an upward trend, it’s likely a strong indicator that it’s a good time to buy in.
Moving Average Convergence Divergence
When seeking additional confirmation, traders and financial analysts often harness slightly more complex techniques. One of the most popular and reliable technical indicators is Moving Average Convergence Divergence, or MACD. While it may sound complicated, MACD is a relatively simple momentum oscillator that incorporates a number of moving averages to accurately identify both bullish and bearish trends in the market.
Calculating Moving Average Convergence Divergence requires several steps, the first of which is calculating the exponential moving average of a security. Exponential moving average calculation is performed in a similar manner to simple moving average calculation, but places a greater emphasis on the most recent pricing data. Incorporating this adjustment into the calculation helps to minimize the impact of lag that is associated with moving averages.
Calculating the 12-day EMA, or exponential moving average of Bitcoin, involves collecting all of the price data for every session during the period and then determining how much emphasis should be placed on the pricing information gathered on the final day when compared to the pricing information gathered from the other sessions in the period.
Using the exponential moving average of Bitcoin to calculate its moving average divergence convergence required investors and traders to calculate the EMA of the currency for two different periods. In the following example, we’ll use both a 26-day EMA and a 12-day EMA. The 26-day exponential moving average calculation is subtracted from the 12-day calculation, which yields the MACD of the currency.
It’s also possible to use trading software to calculate the MACD or EMA of a Bitcoin, which can streamline the trading strategization process. Calculating MACD provides a highly accurate mathematical assessment of whether any given security is either oversold or overbought. Joe Lee of Magnr states that as security prices go through predictable cycles, calculating MACD can provide a great deal of insight into the current state of a currency.
Relative Strength Index
If you’d like to go deeper into the use of technical indicators to assess whether Bitcoin is currently oversold or overbought, another technical indicator called the Relative Strength Index can provide a greater level of understanding.
Relative strength index, or RSI, measures the magnitude of the recent price movements of a security to provide a more accurate assessment of whether it is experiencing an upward or downward trend. By using relative strength index to determine when Bitcoin is overbought, it’s possible to pinpoint key opportunities that can be exploited to generate compelling profits and avoid overpaying for the currency.
Using the same technique to identify when Bitcoin is underbought, however, can help traders identify the most opportune moment to buy in. Calculating the relative strength index of bitcoin can help traders refine their investment strategy and optimize overall profitability.
Complex and technical indicators such as moving average convergence divergence or relative strength index are referred to as lagging indicators, as they can only be calculated ex post facto and trial the price of Bitcoin.
As these indicators provide historical insight into security prices, they may not be able to provide you with the insight you’re looking for or deliver the information necessary to make a successful trade until after the trade is concluded.
Due to the retrospective nature of most technical indicators, many traders ascribe to the notion that price is the best indicator of all. Petar Zivkovski, the COO of Whaleclub– one of the largest leveraged digital currency trading platforms- states that after years of manual trading experience the best indicator is price itself.
According to Zivkovski, technical indicators such as relative strength index and moving average convergence averages are functions of price, and thus delayed relative to price by definition. Any information delivered by lagging indicators, states Zivkovski, is slower than what can be inferred from the price of a security.
Trader Psychology And Market Sentiment
In order to leverage the insight delivered by technical analysis, it’s essential to obtain an understanding of trader psychology and the impact it can have on the Bitcoin market. Virtually all assets, such as stocks and bonds, invariably follow cycles that include both busts and booms.
Petar Zivkovski of Whaleclub states that technical analysis is a powerful and effective tool simply because many traders use it as part of their investment and trading strategies. According to Zivkovski, technical analysis is a psychological tool that works because other traders are using it too.