The cryptocurrency market is notoriously volatile, or at least it has been for much of its short history. While its volatility often provides an opportunity for big gains, it also makes price movements difficult to predict. This has often served to discourage beginner traders, since initial enthusiasm can easily turn into later disappointment, especially if the losses end up being significant. However, while the cryptocurrency market (or any other) will never be entirely predictable, there are a number of tools investors can use to help them navigate more securely.
In fact, there are hundreds and hundreds of different indicators and metrics that cryptocurrency traders can use to analyze the cryptocurrency market. This article focuses on the six most useful of them, from moving averages and strength indices relative to linear regression channels and Bollinger bands. Taken together, these crypto indicators should help the careful investor to time their trades somewhat more reliably, although it should be remembered that technical indicators should not be taken separately from fundamentals (i.e. market news).
Fear and Greed Index
Starting with probably the simplest, the Fear and Greed Index is a metric that ranks market sentiment from 1 to 100. 100 indicates highly bullish conditions (“extreme greed”) while 1 indicates highly bearish conditions (“extreme fear”).
There are a variety of fear and greed indices in the cryptocurrency ecosystem, with Alternative.me’s Crypto Fear & Greed Index being the best known. It comes to a measure of market sentiment by monitoring various data sources, from price movements to social media activity.
Basically, if the index is at the “greedy” end of the spectrum, it suggests that (further) price increases are more likely than falls, and vice versa for scores at the end of the “fear”. Of course, such data must be supplemented with a reading of other sources of information, although the same applies to virtually every metric in this article.
Relative strength index (RSI)
The relative strength index is an indicator of an asset’s momentum, calculated by comparing current prices with recent averages. Its job is to indicate whether a certain cryptocurrency or stock is overbought or oversold.
In the chart above, bitcoin’s relative strength index is shown in purple (more on the red and blue lines below). The RSI is more useful and informative when designed over a longer period of time, with bitcoin’s current RSI below 40. This indicates that BTC remains oversold, with the cryptocurrency appearing to have bottomed out around July of 2022.
When the RSI falls above 70 (and rises higher), it is generally understood as an overbought (at its maximum) and may start to fall at some point in the not-too-distant future. This was actually the case in November 2021, when bitcoin’s RSI exceeded 90.
Similarly, declines below 30 tend to indicate a bottom, although it can take months for an asset’s price to fully recover from that low.
Moving averages (MA)
Moving averages are another useful metric for measuring momentum, especially when a trader compares a short-term average to a long-term average. MAs are produced simply by calculating an average price for a given asset over a given period of time (e.g. 30 days, 90 days, 200 days, etc.).
In the bitcoin chart above, the red line indicates BTC’s 30-period moving average, while the blue line is its 200-period average. Comparing both is useful because they can reveal trends, with the chart above showing that BTC’s 30-period average has fallen below its 200-period period in October. This is known as the “death cross” and usually signals further losses (which was in fact the case in the graph above).
Of course, as a delayed indicator, moving averages only reveal past trends and cannot guarantee the future. However, when combined with other metrics, they provide a useful hint about future trends in the cryptocurrency market.
Linear regression channel
More for short-term and day traders, linear regression channels are used to determine the direction of trends, providing buy and sell signals to traders who know how to use them.
In the chart above, blue and red channels are used to predict when bitcoin is likely to return up or down. In this particular example, BTC’s latest price record peaked above the top of the blue channel, signaling that it is likely to come back down again, and therefore may not be a good time to buy, at least if you are looking for a very quick profit.
Bollinger bands are upper and lower trend lines drawn by calculating two standard deviations from the moving average for any given asset. As with other indicators on this list, they serve to indicate the highs and lows of an asset’s recent price action, thus indicating rallies or upcoming sales.
As the chart above illustrates, the price of bitcoin hitting the bottom of a Bollinger band tends to indicate a rally or the end of a decline. On the contrary, reaching the top portends a fall.
Using Bollinger Bands in combination with RSI, moving averages, and other metrics can help provide a comprehensive account of what a cryptocurrency is likely to do next. Although, again, technical indicators can always be captured by an unexpected news or “Black Swan” event.
Convergence/divergence moving average
While this is probably the most
complex metric feature here, moving average convergence/divergence is probably the most powerful in terms of predicting incoming movements. This is because it shows how far short-term price momentum is deviating from long-term momentum, providing another indicator of upside or bear in the market.
There are three pieces of information to consider in a moving average convergence/divergence. These are the MACD line (in blue above), the MACD signal line (yellow/orange) and then the bars in green or red. These bars show how much the MACD line diverges from the MACD signal line, with green bars indicating that it is higher and red bars indicating that it is lower.
Essentially, the idea here is to show the direction of momentum: if the blue MACD line is above the yellow line of the MACD signal, price movements are likely to be positive (and vice versa).
Regular monitoring of the above metrics can help a trader predict market developments more accurately. However, since they are all based on past data, they really need to be balanced with a reading of the cryptocurrency market news, which can provide further clues as to what will happen in the coming days, weeks, and months.
This includes an understanding of the fundamentals of any cryptocurrency, which provides insight into how the market is likely to take that cryptocurrency in the future. Just by looking at the whole picture like this can a trader or investor be sure that they have done everything they can to improve their chances of profit.