This guide contains my best technical indicators for cryptocurrency trading – copy the tools I use to accurately predict Bitcoin and Etherum – before their prices went up further by 50% after I bought at $6,300 on the Luno platform.
I have been trading Bitcoin and Etherum actively in the past 3-4 months after a friend encouraged me to re-try the cryptocurrency market. He believed that my good use of technical analysis in the stock market would help me spot trade opportunities more in the crypto-currency market.
Since then, I have generated over 50% profit trading Bitcoin and Etherum. My decision to trade Bitcoin and Etherum isn’t unconnected to the fact that they occupy a larger portion of the cryptocurrency market value and most widely followed by top crypto analyst and financial news websites.
This isn’t my first time of trading cryptocurrencies but was discouraged when I had issues with some of the Nigeria exchanges.
I trade these two cryptocurrencies on the Luno platform via my mobile app, a simple intuitive user-friendly mobile exchange that makes it easy for me to fund my wallet in Naira, then initiate exchange to Bitcoin or Etherum at the current market price with instant execution. On the Luno platform, you fund your verified account with Paystack or PayU payment solutions.
As a technical trader in the stock market, here are the 3 powerful technical indicators I deployed to spot trends in the cryptocurrency market using Bitcoin as a case study.
21/55-Day Moving Average
This indicator measures the average price of Bitcoin for a specific period of time. I use 21 and 55 simple moving averages to spot market trend; whether it is bullish or bearish. While the 55-day MA tells me how the crypto is trending in the last 3 month, the 21-day MA follows market performance in the last one (1) month.
When the 21-day MA cross the 55-day, it signals the beginning of a new trend. For crosses above the longer moving average, it means the market price of Bitcoin is about to trend higher, and a crossover below means we might be in a bearish market; further sell-off is expected.
Please note that moving average alone is not perfect for spotting trend, which is why I validate trend signals by checking the other technical tools.
Let us look at the moving average on a chart:
Despite the daily market volatility, Bitcoin is clearly on a strong bullish run, from a low of $3,800 to 13-months high of $9300, 144% return on your investment if you had invested in the cryptocurrency early April 2019 when the 21-day crossed the 55-day to the upside.
In summary, the 21-day moving average above the 55-day indicates a bullish direction and such a trend means that you should only look for buy opportunities on market dip.
Directional Movement Index
Only a few professional traders use this technical tool to spot trade opportunities in the cryptocurrency market. Directional Movement Index is also known as DMI.
This technical indicator lets you compare the strength of a bull market to bearish market so you can ascertain which trend is winning the war.
DMI has (3) signal line represented by the bull (+DI), bear (-DI) and strength of the trend (ADX).
Let us take a look at how the DMI works on a typical cryptocurrency chart:
From the chart, +DI is the blue signal line while -DI represents the red signal line. The ADX line, which tracks the strength of the trend, is the black signal line.
A perfect interpretation of the DMI indicator is to look for the signal lines that reads higher than the other. The ADX and a +DI (blue) signal line above the -DI (red) signal line mean that the trend is bullish while ADX and a red signal line above the blue line indicates a pending sell-off.
The colour of the ADX, +DI and -DI is my personal preference, you can use choose your colour combinations as long as you can identify the bullish and bearish signal line.
I use the DMI to validate signals generated by the moving average; just like we see on the chart, the 21-MA above the 55-day MA and an ADX/+DI above the -DI line indicates a stronger market run to the upside. On a reverse, if the ADX/-DI rises above the +DI, you might need to consider liquidating your portfolio, especially when the shorter moving average crosses below the longer average.
Stochastic Relative Strength Index
As a professional trader, I already understand that no trend lasts forever; the price of a cryptocurrency won’t go up for long without sellers jumping in to take profit, likewise a falling price. What this means is that I need a technical tool that will help me spot the peak of a bullish or bearish trend so I can avoid buying before market reversal.
This is where the Stochastic Relative Strength Index (RSI) comes in. Stochastic RSI lets you measure the strength of a trend, know when a market is overbought and oversold. An overbought market signals the peak of a market rally where no one may be willing to buy from you. At this point, the trend line is above 80. On the other hand, the oversold region marked by a fall below 20 means that cryptocurrency sell-off is close to an end as sellers may be exhausted soon.
Let us look at the chart and see how the Stochastic RSI work:
From the chart above, the Stochastic RSI measures the point a cryptocurrency may be too high to buy. When this indicator rises above 80, cryptocurrencies seems to correct after a brief rally and a fall below 20 always precede a rally.
While the first two (2) technical indicators signal market direction, I use the tool to buy at a low end when it is below 20 and sell when the moving average and DMI change signals a change in market direction to the downside,
The Stochastic RSI is already in the overbought region, 88; we could see Bitcoin price corrects lower which is another opportunity to buy since the trend is largely bullish; thanks to the moving average and DMI.
Which timeframe do you use?
You might also like to know the timeframe I use for my cryptocurrency trading, I use the daily and 4-hour timeframes because the signals generated on these timeframes let me spot the overall market trend, know when to buy and produces a higher profit on the trade.
If you are looking for a guide on how to get started in the cryptocurrency space, including the best platform to trade from your mobile, click here to register with Luno.
Feel free to share your comments and questions below:[learn_press_featured_courses]