The cryptocurrency markets are like the high seas. The price fluctuations do not happen in ripples. They usually happen in the form of massive waves that keep shifting every second of the day. However, that doesn’t mean that it is all random.
There are plenty of people who make tons of money through crypto trading. The fact that these people are consistently making profits from their trading is evidence of the fact that there is some science and logic to crypto markets, and that with the right tools, these markets can be forecasted with a reasonable degree of precisions. So, how do these top traders make their money? The answer is – market indicators.
Market indicators are the statistical quantities that the best traders employ to predict the behavior of the crypto markets in the nick of the time and then take timely action to make profits from their predictions.
So, what’s stopping people from using market indicators to make accurate predictions and start making profits at crypto trading platforms? The truth is that there are an endless number of market indicators and not all of them provide useful information.
A large number of them provide similar information. If you are using one, then you can simply ignore the other similar ones. So, it is crucial to recognize the important market indicators and then use them to determine the short term performance of the markets.
Here are the best and the most reliable market indicators that almost every smart crypto trader uses:
Moving Average (MA)
Moving Average, also known as Simple Moving Average, is one of the simplest and most powerful market indicator. It is the average value of the closing prices of a cryptocurrency over a specific period of time. So, if you come across something called a “50-Day MA”, then it means that the moving average is calculated over a period of 50 days, i.e. average value of the closing prices during a 50-day period.
So, how many days should you take into account?
This part is tricky. The cryptocurrency market does not work like forex markets. The price fluctuations are not a product of complex market conditions, political conditions, economic reasons, and so on. Such kind of factors take place over an extended period of time. For instance, if the shares of a company are increasing, that could be because the company just posted profits.
However, the fact that the company is making profits would be in the news for quite some time. Only the amount of profits would be made public at the end of the financial year. So, the trends in forex markets last over a long period.
On the other hand, most of the price fluctuations in the cryptocurrency market arise out of speculation. The trends in these markets are short lived. Usually, in the case of forex markets, a 25-day moving average is considered to be a good indicator of a short term trend.
But, as discussed, the trends are usually short lived. So, when the market has been going up for the past 20 days, it doesn’t necessarily mean that it is really picking it. It could just fizzle out on the 21st day.
Don’t worry. There is a trick to confirm a trend. That is long term moving averages. You calculate the moving average over a longer period like 100 days, 200 days, etc. If the short term MA crosses over the long term MA, then it means that there is a sustainable trend building up in the market.
If the short term MA drops below the long term MA, then it means that the market is falling. On the other hand, if the short term MA grows above the long term MA, then it means that the market is picking up.
Market Depth is one of the most popular market indicators used by top crypto traders. Naturally, any good trading platform worth its salt will feature this market indicator on their platform. This indicator is best understood with the help of the graph below:
The orange line indicates the volume of cryptocurrency, which in this case is bitcoin, that are available for purchase. The blue line indicates the volume of cryptocurrency that are available for sale. The present value of the cryptocurrency is the lowest point on this graph, which is somewhere around $23 on the graph above. The Y-axis indicates the volume of bitcoins.
If you place the cursor on any point on the graph, it will display the number of bitcoins that are available for sale or purchase at the corresponding price. For instance, there are about 40,000 requests for the purchase of bitcoins at the price of $19.5 per coin. At the same time, there are about 40,000 requests for the sale of the bitcoin at the price of $30 per coin.
There is another piece of information available in this graph – the number of bitcoins to be purchased or sold for the price to hit a certain level. If you focus on the blue line, you will see that there are more than 10,000 requests for the sale of bitcoin for a price of $24. There are also many sale requests for prices below that. A bit of guessing and a bit of estimation will help you realize that if the traders purchase another 20,000 to 25,000 bitcoins, then the price of the bitcoin will increase from its current rate of $23 to $24.
Most Recent Trades
This market indicator is found on almost all the crypto trading platforms. It continually updates with the information about the latest trades that are executed on the platform. It provides the history of all the recent trades.
Ideally, you would want to see the trades that are made by the most profiting traders on the platform. However, that feature is not available on all platforms. So, you have to make do with the entire recent history of the trades executed on your platform, which is available on almost every platform.
You can carefully check the recent trades to understand the prices at which the cryptocurrencies are being sold or purchased on the platform by various traders. If a decent number of traders are making a similar move, then it’s always advisable to replicate their actions, whether it is buying or selling the cryptocurrencies.
Crypto markets operate as herds, as per the general mood of the community. If the general mood is that the market is going down, then everybody starts selling and the prices will go down, and vice versa.
Trading volume is a standard market indicator that is present on all major crypto trading platforms. It is usually represented as a bar graph. The vertical columns indicate the volume of trades that are executed at different points in time.
The trading volumes are a perfect indicator of the general mood of the community to a specific change in the price of the cryptocurrency. For instance, if the price increases and the trading volume also increases, then it means that the market supports the rise in price. On the other hand, if the trading volume decreases when the price increases, then it means that the market is against the rise in price.
This could be because the community feels that the price increase is caused by a short term trend or a fad and will collapse back soon once the trend wanes.
There is one exception though. Whenever you encounter unusually high trading volumes, remember that it is almost surely a sign of an imminent change of the medium term or long term trend of the market.
Moving Average Convergence Divergence (MACD)
The MACD is one of the best indicators of market dynamics. It is relied heavily by traders in the forex markets and the crypto traders too use it.
The most alluring aspect of MACD is that it predicts the trends even before they begin, which is remarkable. Secondly, the MACD not only predicts the trends but also provides an indication of the strength of those trends. That’s incredible.
The MACD line is the difference between two MAs – a fast moving average and a slow moving average. This difference is plotted to create the MACD line. Then another moving average (faster than the one used for calculating the MACD line) is used to create a signal line.
When the MACD line touches the signal line, it is a sign of the changing market trends. If the line drops below it, then you should sell your cryptocurrency. Alternatively, if line goes above the signal line, it means that you should purchase.