Crypto assets are known for their volatility. Technical indicators used to track volatility are, therefore, an essential tool for investors looking to profit from crypto trading. For beginners, the main indicators to follow are the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD).
However, investors seeking a more comprehensive strategy should focus on other, less well-known indicators. This article will focus on broader indicators and what they reveal about investors’ crypto assets.
Why Look Beyond RSI and MACD?
RSI and MACD are among the most effective indicators, and there’s a reason why they are so often used. But they also have limits that become apparent over time. For instance, RSI can remain overbought or oversold for extended periods during strong trends. This can lead investors to try to exit too early. MACD, on the other hand, is a lagging indicator. It means that it often confirms trends only after a large portion of the move has already occurred.
Crypto markets tend to shift suddenly, so these indicators aren’t effective at capturing changes before they happen.
Trend and Momentum Indicators
Average Directional Index (ADX)
The Average Directional Index measures the strength of a trend and not its direction. Values below 20 typically indicate a weak market, and those above 25 indicate a strong trend is forming. ADX is used to determine whether an investor should follow a trend or stick to a broader strategy.
Stochastic Oscillator
The Stochastic Oscillator compares the closing price to a recent price range. When these two metrics are combined, they indicate that momentum is shifting. It’s more reactive to price movements than RSI, and investors usually use it to spot reversals.
Triple Exponential Average (TRIX)
TRIX applies triple smoothing to price data. In a way, this means investors will be able to cut through market noise. The metric oscillates around a zero line, with crossovers signaling changes in momentum. TRIX is most useful when there are a lot of minor price fluctuations.
Range Expansion Index (REI)
The Range Expansion Index focuses on how strongly prices are moving relative to their recent range. By using this metric, investors can identify overextended price movements and avoid falling for them.
Volume and Market Participation Indicators
Just a few years ago, the main use of cryptos was for crypto casinos and payments made to them, without providing personal data. The innovation greatly improved the gambling industry and opened it up to new markets. Using crypto for casino payments is safe, fast and inexpensive. It’s also widely used for smart contracts.
However, now that cryptos are widely accepted as a payment and investment option, they are used in much greater volume. It’s another metric an investor should follow, but with a nuance taken into account.
Volume-Price Trend (VPT)
VPT combines price direction and trading volume. This metric assesses whether the trading volume supports the current price. If both the price and VPT increase at the same time, it indicates strong market participation.
On-Balance Volume (OBV) and Money Flow Index (MFI)
OBV tracks cumulative volume by adding or subtracting volume based on price direction. This helps identify accumulation or distribution phases. MFI further incorporates price into its calculations, providing a clearer picture of the pressure to buy or sell. The indicators are mainly used to confirm a breakout.
TRIN (Arms Index)
TRIN measures market breadth by comparing advancing and declining assets when compared to their respective volumes. While less common in crypto, it’s still sometimes used to provide insight into broader market sentiments. It’s especially useful during the euphoric market phases that follow a big event.
Volatility and Price Range Indicators
Bollinger Bands
Bollinger Bands consist of a moving average with upper and lower bands based on standard deviation. These expand and contract in response to cryptocurrency volatility. Squeezes usually precede major breakouts, allowing users to make predictions.
Moving Average Envelopes
Moving Average Envelopes place fixed-percentage bands around a moving average. This means they don’t adapt to volatility. It helps traders visualize overextended price movements during market trends.
Zero Lag Exponential Moving Average (ZLEMA)
ZLEMA is designed to reduce the lag found in the traditional moving average. It reacts quickly to price changes, helping traders identify shifts more quickly.
How to Combine and Interpret Multiple Indicators
A single indicator can’t capture the state of the market, no matter how well chosen it is. The most effective strategies combine the use of multiple metrics to gain the best understanding of the market and to predict future market movements. Trend indicators like ADX or ZLEMA can determine whether the market is trending, while momentum tools such as Stochastic or TRIX help time entries and exits.
Volume-related metrics, such as VPT or OBV, can then confirm whether price movements are supported by real market participation. Tools such as Bollinger Bands are able to anticipate breakouts or consolidations.
It’s equally important to choose a timeframe that highlights the best indicators. Some indicators may work on a daily chart but create a lot of noise on a five-minute chart. Traders should also avoid using too many indicators at once. It can lead to conflict signals and wrong decisions.
A Few Practical Examples
For instance, Bitcoin could be trading sideways before entering a consolidation phase. Bollinger Bands begin to narrow, signaling reduced volatility and a potential breakout. ADX starts rising from low levels, suggesting a new trend may be forming. VP will increase sharply when the price breaks above the resistance level.
The traders who use all of these indicators will be in a better position than those who use only RSI or MACD, which are more common.
To Sum Up
RSI and MACD are valuable tools, but crypto traders should use many other available metrics in order to get a better idea of how the markets are shaping up. The traders can use more than one indicator at once, and when combined, these will provide them with much better predictive ability. As the crypto market gets more complex and broader, so will the tools used to facilitate trade.
