The most important crypto trading indicators

A penchant for the new financial instruments and better financial literacy might quite well be the reason for the rising interest in crypto trading. While there is a general consensus as to what the market direction is going to be, professional crypto traders always have a few more tools up their toolbelt. Many of these tools revolve around using the right crypto trading indicators to understand overall market sentiments, the best prices for a buy or sell, and whether the major and minor trends are bullish or bearish.

Why Use Crypto Trading Indicators

If you’re wondering why you need to use crypto trading indicators, here are a few reasons

  • Many trading indicators allow you to make a decision keeping in mind both the price as well as volume. This allows crypto traders to gauge the strength or conviction of buyers or sellers.
  • Trading indicators can show an in depth view over a large time period. This means that they help you make informed decisions based on historical data, how the crypto markets have responded to certain triggers in the past, where the best support and resistance zones are, and so on.
  • Trading indicators are vital to proper technical analysis that helps traders identify profitable opportunities and maximize revenue without letting emotions get in the way.

Here are the top crypto trading indicators you might want to take a look at.

1.  Bitcoin Dominance

While the total number of crypto tokens have grown from 66 in 2013 to more than 7000 today, many traders and crypto investors stand by the fact that Bitcoin makes or breaks the market.

As an investor or a trader, having a fair idea about the bitcoin dominance helps you identify major market moves and the possibility of trades in most cryptos that follow BTC movement.

This is nothing but a measure of the market capitalization of BTC with regards to the whole market cap of the crypto space. It is very important for those looking to understand the general direction of altcoins with respect to BTC.

Generally speaking,

  • As BTC dominance increases, alts tend to lose value as compared to BTC. This is a safe time to invest in BTC.
  • As BTC dominance decreases, alts tend to be more valuable, meaning that this is a good time to opt for alts.

It is crucial to have multiple analyses in different time frames to gauge BTC dominance. Learning to use this indicator helps you make accurate predictions.

Bitcoin dominance

2.  Spent Output Profit Ratio Indicator

Spent Output Profit Ratio or SOPR is an indicator that helps crypto traders understand the macro market sentiment. This includes analysis about the profitability and the losses in the time-frame of your choice. It also includes the degree of profits realised for all coins.

This is computed using the coins moved in the time frame of your consideration. It can be interpreted as follows

  • SOPR > 1: Coins moved so far are on average selling at profit
  • SOPR < 1: Coins moved so far are on average, selling at loss
  • SOPR =1: Coins moved so far are at break even
  • A higher SOPR shows that profits are being realised. It is possible that previously illiquid supply is being returned into circulation
  • A lower SOPR shows that losses are being made. It is also possible that profitable coins are not being spent.

It is a great tool in almost all market conditions. It takes into account the profits and losses across a day, allowing you as a trader to reflect market sentiments and take actions accordingly.

3.  On-Balance-Volume (OBV)

Volume simply refers to the number of shares or tokens bought and sold in a certain period of time. For crypto tokens, on balance volume is used to look at the daily volume. A running total maintains the current OBV, along with previous days, months, and weeks.

OBV uses analysis of volume flows to predict changes in the token. Thus, OBV can be used to confirm market trends, allowing traders to minimise risks and maximise gains.

In addition, OBV is a great way to identify reversals, showing you the best places to buy and sell.

  • A divergence between the price of the cryptocurrency and the OBV is usually a sign of reversal.
  • Cryptocurrency price increase and an OBV decrease might signify an impending fall, while a price decrease and OBV rise signifies a good chance of a rise.

This is not the perfect way to analyse crypto tokens, but having this additional tool acts

as a great way to gain confirmation  for your trade.

  • If closing prices are equal, or in case of crypto, prices locked at fixed time periods are equal, the OBV remains the same.
  • If the price today at close or a fixed time is higher than the previous day, the OBV today is yesterday’s OBV + today’s volumes
  • If the price today is lower, the current OBV is yesterday’s OBV – today’s volumes.

You can check crypto volume in real time for multiple tokens with Algory Crypto Scanner

4.  Crypto RSI

Many reputed analysts and organisations take a serious look at the RSI to confirm trends and bias. Crypto RSI is known to show early signs of selloffs, bullish momentum and reversals.

Put simply, RSI, or relative strength index, shows whether an asset is overbought or oversold. It can function as an oscillator for high and low bands. The high volatility nature of crypto tokens and the need for a knowledge of slight sensitivities make RSI a great way to identify entry and exit points, allowing for minimal risks.

The asset is said to be overbought when the RSI is at or above 70%, and oversold when the RSI is about or below 30%. This helps traders identify uptrends and downtrends that are looming, and also identify the start and end of a trend before it actually plays out. RSI divergence is a great market indication, allowing better risk management and better reading of market signals to maximise profits.

In short, the RSI is nothing short of a momentum indicator that acts as a reliable guide to right entry and exit points. In addition to regular RSI, some crypto traders also use the stochastic RSI, a similar technical indicator that is built by combining the formula for stochastic oscillator and RSI. The same principles apply to stochastic RSI as well. An overbought asset signals an impending downtrend, while an oversold stochastic RSI signals an uptrend in coming times.

Crypto RSI

5.  Moving Average Convergence Divergence

Moving average convergence divergence indicator, commonly called the MACD, is yet another commonly used momentum oscillator. It is extremely useful for trend following crypto traders. An MACD line and signal line are used in this indicator. The MACD like is calculated as the difference of 26 period exponential moving average(EMA), and 12 period EMA. The signal line is simply the 9-period EMA.

MACD offers both direction and momentum. This is especially useful in volatile instruments like crypto tokens. Traders can

  • Analyse current direction of trend and find out the most probable direction to plan trades
  • Understand the rate of change of prices to better understand the speed or momentum of the trend. This is especially useful if crypto traders want to identify if a trend is just starting out, or about to fizzle down.

MACD has the fastest moving average, or the MACD line, a signal line, and an MACD histogram that displays fluctuations about a zero line for clear momentum readings.

            Traders can use MACD for many types of strategies. The most common include,

  • Crossover based trades that are bullish at MACD over signal line, and bearish at MACD below signal line.
  • Zero line crossovers that signify bullish trend when MACD line crosses above the zero level and bearish when it crosses below.
  • Divergence signals occur when MACD moves in the opposite direction of trend. This calls out that a trend reversal might be imminent. It could also signify a potential decline or rally.

6.  Hash Rate

While not a conventional trading indicator, hash rate plays an important role in identifying the overall health of a crypto network, especially for the popular coins like Bitcoin.

This is commonly used by newcomers to identify the amount of computing power that miners generate. It is a good measure of activity, block creation, and transactions. While it does not do a great job at predicting the future price, it is undoubtedly a crucial indicator if you are looking at network security.

Many other indicators use the hash rate in combination with other factors to give appropriate buy and sell signals, so it might be at the cornerstone of many trading models and activities. This technique does require some fine tuning, though, so it is not to be used as a stand-alone indicator. The bottom line is it offers a lot of potential to maximize revenue without a lot of risk of misinterpretation.

Crypto hash rate

Other Important Indicators

1.   Support and Resistances

Like any other asset that is being traded by a number of people, support and resistance lines and zones are an important technical analysis indicator. They usually signify the major prices at which the asset or token is expected to react. This sets a good idea about the prices at which current trends and strengths make it impossible or difficult to move above or below.

Support and resistance acts like floor and ceiling respectively, defining the boundaries of expected price action, and preparing traders for any changes. The historical data and price action also keeps traders informed about possible turning points, allowing them to keep entry and exit points ready.

It also helps newcomers get used to the trends and moves in the market, acting as the cornerstone to major decisions. They also supplement trading decisions when there is a strategy in place.

2.   Moving Average

Moving average is the average value of asset prices over a fixed period of time. Moving averages can be used to gain a complete analysis over multiple time frames, understand the picture on a larger scale, and make better trading decisions. This is an important indicator for traders and investors alike, offering multiple signals like the golden crossover, death crossover, and so on.

Averages can be simple, exponential, smooth or weighted, depending on how much importance traders want to give to recent data. These are crucial to understanding entry and exits, support and resistances, identify trend direction and even get a better overview of prices without market noise.

Traders can use it to bypass the noise of the crypto market, and compare with moving averages across multiple timeframes for a better trend analysis. As a lagging indicator, moving averages offer confirmation for trend reversals as well.

3.   Fibonacci Retracement

Many crypto traders are of the opinion that crypto assets are mean reverting. This means that they tend to retrace their losses and gains, highs and lows. Fibonacci retracement is one retracement indicator that helps to identify levels where these moves might potentially occur. It captures the highs and lows that the asset prices went through, and it plots certain price points where the retracements are most likely to happen. Calculated with a mathematical sequence, it allows trade monitors to keep a watch out for levels, and take the right trade if other indicators and chart patterns or price action gives confirmation.

4.   Stock To Flow

In scarcity driven markets like crypto, stock to flow models help measure the increase in assets over time versus the assets in existence. The more scarce an asset is, the higher its value is bound to be. Thus, it attempts to predict the price of tokens based on scarcity, and has been used to build statistical models of price movements, predict availability with respect to price and generally acts as a great tool. When used in combination with other indicators, stock to flow is a sturdy prediction model with great promise.

Things To Keep In Mind While Using Indicators

While crypto trading, indicators greatly increase the odds of success. They tend to let you know the best entry and exit points, allow you to minimize and manage risk, and make sound decisions backed by historical data and analysis.

However, using indicators does not guarantee overnight success, nor is it a sure shot way to get rich quick. There is a lot more to crypto trading and investing than identifying the best indicators, picking a token and buying or selling. It requires a great deal of learning, patience, intensive back testing and lots of discipline. Here are some things to keep in mind while you trade crypto tokens with the help of these indicators.

1.  Use a crypto scanner as a supplement to above indicators

It is extremely important that you not only look at the above indicators, but also screen a number of tokens, do analysis with other metrics such as prices, volatility, consecutive negative and positive candles, and then choose a crypto token that fits into your risk appetite and profit expectations. This will require getting real time updates and comparing across crypto exchanges, which can be done with Algory Crypto Scanner. This is important as staying updated with real time data ensures that you can depend not only on above indicators, but also additional metrics for confluence and take the best possible trades.

2.  Stay up to date with crypto news

In order to use indicators and other signals, it is necessary that you stay up to date with the latest in the markets, going through crypto news. This gives you context for every move, and lets you know what the most probable moves are. With the help of Algory Crypto News Aggregator you will save time and never miss an important information from the crypto world.


3.  Use a combination of indicators

No single indicator is going to give you all the data you need. Make sure you use a combination of indicators to make informed decisions. This will allow room for analysis, and multiple confirmations before commiting to a trade. It will also ensure that you do not have to spend hours identifying opportunities. Rather, you can use a combination of indicators to generate a buy or sell signal at the best possible price. Indicators are merely tools to make the best possible trades, and should be treated as part of a larger strategy.

4.  Ample backtesting is a must

Irrespective of how many indicators you have, always make sure you backtest and paper trade to understand how your indicator based strategy works in real market conditions. This helps you avoid mistakes during the trading, as it leaves you with enough time to fine tune and make any changes. In addition, it also lets you get rid of indicators that are not working for you, understand the interplay and signals, and play with real world data in real time, making it the perfect test for any trading strategy you come up with.

Crypto trading is definitely an intriguing market that can display immense volatility, but it is also full of opportunities and learning. In order to make the best of this, indicators are a great guide. However, they have to be used in combination with other analysis and a sound trading strategy if you are to trade in the crypto markets.