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Cryptocurrency Technical Analysis: Six Key Pivot Tools

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Fundstrat technical analysis

Much like a stock, cryptocurrencies are driven by fear and greed. Therefore, frequent technical analyses of the markets are advisable

And much like a stock, you need to be greedy when others are fearful, and fearful when others are greedy, as Warren Buffett would advise.

But how to we know when that happens?

One way is to use simple technical tools that pinpoint the exact moments that fear and greed are getting way out of hand. To do so, think of a crypto like a rubber band. We can only pull that rubber band so far before it snaps back and begins to revert to mean.

This is where the momentum oscillators and technical indicators come into play. Using specific signals, these indicators help traders make almost accurate predictions regarding the direction and momentum of the market trend. Below are six technical indicators frequently used in crypto trading.

Technical Indicator 1: Moving Averages

By now, you’re well aware of how to find trends using simple moving averages, such as the 20- and 50-day moving averages. But you should also know how to spot the moment when a trend could potentially stop dead in its tracks, or birth a new trend.

All we have to do is wait for a crossover to do so.

For example, we can spot a bullish “golden cross” when the short-term moving average, such as the 20-day, crosses above the longer-term 50-day average. When this happens, we’ll typically see a stock or an index move higher.  Or, we can look for a death cross, where the short-term moving average crosses below the longer-term average. 

Additionally, we can use the 50-day and the 200-day simply moving averages as our “line in the sand.”

Not only am I looking for crossovers for golden and death crosses, I want to see if a stock is holding its own above them.

If not, it could be a sign of potential problems and selling pressure.

The 50-day and 200-day are both powerful because they give us a view of a stock’s trend. The also indicate where we may find support and resistance along the way.  For example, if I find a stock that historically bounces every time it hits its 50-day moving average, I’m likely to buy on a test of that moving average.

That’s because, as they say, the trend is your friend.

Technical Indicator 2 : Moving Average Convergence Divergence (MACD)

Another widely used and reliable technical indicator is MACD (Moving Average Convergence Divergence). This technical indicator functions as a momentum oscillator. It shows the relationship between two moving averages of prices and follows the trend shown by the market. Despite acting as an absolute price oscillator, MACD cannot be used for identifying oversold and overbought conditions. It analyzes the two 2 EMA (exponential moving averages), the long-term 26 day and the short-term 12 day EMA.

MACD also has a nine-period EMA called the ‘signal line’. This zero line acts as a trigger for selling and buying signals.This signal line offers negative and positive values for calculating MACD. In MACD, the crypto predictions are made by evaluating the 3 line crossovers. This reliance on the three price periods is purported to provide above average accuracy in the case of MACD predictions.

Technical Indicator 3: Stochastic Oscillators

Stochastics are known technical indicators that act as general range-bound oscillators to gauge the price momentum. This stochastic oscillator compares a cryptocurrencies’ closing value to its other prices over a particular time period.

The main function of a stochastic oscillator is checking the oversold and overbought levels. These levels, in turn, specify the falling and rising price momentum. 

The primary goal of this technical indicator is the correct interpretation of the readings between 0 to 100. The foundation of stochastic is based on an idea that a price should shows new heights when a trend is upward. Similarly, the price should shows new lows when the trend is downward. The stochastic keeps track of these potential price fluctuations. Generally, the stochastic moves much more rapidly compared to the price values. So, the stochastic stays near 100 or near 0, since prices cannot continually remain high and low, respectively.

For this reason, one of the most common uses for the stochastic is as an oversold and overbought indicator. When values reach above 80, it indicates an overbought condition. Similarly, when values reach below 20, they indicate an oversold condition.

Technical Indicator 4: Relative Strength Index (RSI)

The Relative Strength Index (commonly called RSI) acts as a momentum indicator which helps measure the value of the latest price changes. This technical indicator shows an oscillation between 0 and 100. The main purpose of RSI is recognizing and indicating oversold and overbought situations which occur during a crypto asset trade. Its fundamental concept states that a coin has the potential for falling if crypto traders overbuy it. Similarly, a coin has the potential for rising if traders oversell it.

For determining RSI, one needs to calculate RS (relative strength) . RS is the the ratio of the mean gain and mean loss.

RSI=100-(100/(1+RS)); RS=Mean gain/Mean loss

We can use RSI to confirm the other indicators above. When the RSI moves to or above the 80-line, we have an overbought condition. When the RSI moves to or below the 20-line, we have an oversold condition.  It confirms what Williams was telling us.

Technical Indicator 5: Directional Movement Index (DMI)

Another technical indicator is DMI (Directional Movement Index), which works to spot the trends in crypto prices. These price trends include consistent downward and upward movements. Like the RSI and stochastic, the plotting of the DMI falls between the values of 0 and 100.

The DMI possesses 3 curves, including DI+, DI- and ADX (average directional index).

As for the calculation of DI+ and DI-, one has to consider the close, high and low values of the previous periods. The task of ADX curve is take and normalize these values through an EMA. Entry and exit is possible at the correct moments using the trend-strength calculating functionality of the DMI. Since the DMI is a lagging technical indicator, it is able to identify the market trends only when the trend has started.

Technical Indicator 6: Bollinger Bands

Bollinger bands are types of technical indicators which appear above the price chart for indicating its volatility. There are three lines in this indicator:

  • An upper curve (median curve added to two times its standard deviation)
  • A lower curve (median curve minus two times its standard deviation)
  • A median line (which is actually a 20-period EMA)

Named after John Bollinger, the Bands are typically placed two standard deviations above and below a moving average.  For example, a trader may choose to use an intermediate-term moving average of 20 with two standard deviations above and below that average.

The idea behind these bands is simple.  When a stock – or index – touches or penetrates the lower band, the situation can be considered oversold.  When a stock touches or penetrates the upper band, it can be considered overbought.



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