DataDash’s In-Depth Guide to Swing-Trading Cryptocurrencies
In Module 3, we
will be discussing the following: Technical indicators are tools
traders use to aid their decision-making process visually. It
allows traders to get a grasp of the current market
conditions in the shortest time possible. It also allows them to
interpret price action using an overlay of tried and tested indicators without
having to calculate them manually. Every technical indicator has a
formula underlying it, and every indicator can be used in its own unique
fashion. We will be covering four indicators today — the simple
moving average, the relative strength index (RSI), the
bollinger band and the moving average convergence
divergence (MACD). There are several different variants of moving
averages on most charting platforms. They include simple, exponential,
smoothed and weighted. The difference in all of them is the way the
averages are calculated. We will be discussing the most basic
form, here: the simple moving average (SMA). SMA is calculated by
adding together all the close prices of X periods of bars (the
timeframe of the chart), where X is defined by the trader. For
example, if the price chart has a daily timeframe, and the
trader chooses 50 as the period, the SMA will reflect the average
of the past 50 days of closing prices. Most traders choose to adopt multiple
SMAs for their technical analysis. In this case, we could choose to use 50, 100
or 200 SMAs as an example. Hence, the way the moving averages
interact on the price chart could be used as signals for entering or
exiting a position. Having three moving averages allow you to classify
them as such — fast (50 SMA), moderate (100 SMA), slow (200 SMA). The fast SMA
will track the price a lot more tightly than the slow SMA. The order of
positioning of the three SMAs on the chart could tell the trader in an instant
the “trend” of the asset. If fast > moderate > slow, we are said to be in an
uptrend, and the reverse is true. Besides being able to illustrate
the trendiness of an asset in an instant, the SMAs could also be used for
finding support or resistance points. In an uptrend,
we could use the different SMAs as potential points to enter a long
position. In the example in the video, see how the 50, 100, 200 SMAs on the
daily chart lead to great buy entries for Bitcoin during the 2016-2018
bull run. The recommended timeframe for finding great swing-trading
entries would be in the daily time frame. Applying these commonly used
periods (100, 200) is extremely effective in capturing the intentions of
other traders as well, making the SMA a leading go-to indicator for
determining support and resistance. However, you could also apply the SMAs on a
smaller timeframe (5M,1H, 4H) if you prefer to use it as a day-trading
tool. Observe how the different SMAs interact with price differently in
the different timeframes and make your own conclusions! We
recommend using these SMAs on a higher timeframe, as they produce better
results in detecting good support/resistance points for swing trades. The
RSI is an oscillator that has values from 0 to 100. It is a great tool to use
for finding retracement and rebounds, as it is great for detecting
overbought/oversold markets. As the RSI prints above 70 or
below 30 (the lower the number, the weaker the market), you could say
that the market is overbought or oversold. So be careful when
markets become overextended! Do not get caught in a “FOMO” moment! In an
uptrend, a great buy entry signal would be to wait for RSI to drop to the
30 level before buying. Similarly, in a downtrend, a great short entry
signal would be to wait for RSI to rise above 70 before selling. Though
the RSI can be used in any timeframe the trader wants, we recommend using it on
the daily and longer timeframes. The signals generated from these longer
timeframes are more relevant for using RSI as an entry/exit indicator for
swing trades. Bollinger bands are a great tool for measuring market
volatility. Volatility is a measure of variability of price within
a certain timeframe. When markets are said to be volatile, prices can change
drastically in a short time. The reverse is true. When markets are not
volatile, price movement is sluggish and tends to stay within a certain range.
Bollinger bands indicate volatility through the use of thre lines: an SMA of
price and an upper and lower band. The upper and lower bands represent a
standard deviation variable more or less than the SMA. The default
setting of the standard deviation variable is two, which means that the
upper band is two standard deviations more than the SMA, and the
lower band is two standard deviations less than the SMA. Bollinger bands are
effective in detecting overbought and oversold conditions. As the upper and
lower bands are calculated using two standard deviations as a default, there is
a 95% chance that price will remain within the bands. Hence, when price pushes
at the outer bands, there is a good chance that a retracement will occur. The
moving average convergence divergence (MACD) is an indicator that
is composed of three different visual plots: The MACD line shows the difference
between two different exponential moving averages of price, defaulted to
12 and 26 periods. This means that when the MACD Line is above 0, the 12-EMA is
above the 26-EMA, and when the MACD Line is below 0, the reverse is true. Hence,
when the MACD Line is moving upwards, it usually indicates upward
momentum on price. The signal line is the moving average of the
MACD Line, defaulted to nine periods. When the MACD crosses the signal
line from the top, it can indicate a slowdown of upside momentum, and can
be interpreted as a bearish signal. When the MACD crosses the
signal line from the bottom, it can be interpreted as a bullish
signal. Lastly, the histogram depicts the difference between the
MACD line and the signal line. When the MACD line is above the signal
line, the histogram prints in the positive and the reverse is true when the MACD
line is below the signal line. The MACD indicator is a great tool to depict
momentum and changes in momentum. The MACD is also a great oscillator, and can
be used to detect overbought and oversold conditions. Use the change in the
histogram (from positive to negative or vice versa) to generate buy/sell
signals. The MACD can be especially useful when used in combination with a
larger trend indicator to assist in triggering entries and exits. This
article is intended to be used and must be used for informational
purposes only. It is important to do your own research and analysis before
making any material decisions related to any of the products or services
described. This article is not intended as, and shall not be construed as,
financial advice. The views and opinions expressed in this article are the
author’s own and do not necessarily reflect those of CoinMarketCap.
In Module 3, we
will be discussing the following: Technical indicators are tools
traders use to aid their decision-making process visually. It
allows traders to get a grasp of the current market
conditions in the shortest time possible. It also allows them to
interpret price action using an overlay of tried and tested indicators without
having to calculate them manually. Every technical indicator has a
formula underlying it, and every indicator can be used in its own unique
fashion. We will be covering four indicators today — the simple
moving average, the relative strength index (RSI), the
bollinger band and the moving average convergence
divergence (MACD). There are several different variants of moving
averages on most charting platforms. They include simple, exponential,
smoothed and weighted. The difference in all of them is the way the
averages are calculated. We will be discussing the most basic
form, here: the simple moving average (SMA). SMA is calculated by
adding together all the close prices of X periods of bars (the
timeframe of the chart), where X is defined by the trader. For
example, if the price chart has a daily timeframe, and the
trader chooses 50 as the period, the SMA will reflect the average
of the past 50 days of closing prices. Most traders choose to adopt multiple
SMAs for their technical analysis. In this case, we could choose to use 50, 100
or 200 SMAs as an example. Hence, the way the moving averages
interact on the price chart could be used as signals for entering or
exiting a position. Having three moving averages allow you to classify
them as such — fast (50 SMA), moderate (100 SMA), slow (200 SMA). The fast SMA
will track the price a lot more tightly than the slow SMA. The order of
positioning of the three SMAs on the chart could tell the trader in an instant
the “trend” of the asset. If fast > moderate > slow, we are said to be in an
uptrend, and the reverse is true. Besides being able to illustrate
the trendiness of an asset in an instant, the SMAs could also be used for
finding support or resistance points. In an uptrend,
we could use the different SMAs as potential points to enter a long
position. In the example in the video, see how the 50, 100, 200 SMAs on the
daily chart lead to great buy entries for Bitcoin during the 2016-2018
bull run. The recommended timeframe for finding great swing-trading
entries would be in the daily time frame. Applying these commonly used
periods (100, 200) is extremely effective in capturing the intentions of
other traders as well, making the SMA a leading go-to indicator for
determining support and resistance. However, you could also apply the SMAs on a
smaller timeframe (5M,1H, 4H) if you prefer to use it as a day-trading
tool. Observe how the different SMAs interact with price differently in
the different timeframes and make your own conclusions! We
recommend using these SMAs on a higher timeframe, as they produce better
results in detecting good support/resistance points for swing trades. The
RSI is an oscillator that has values from 0 to 100. It is a great tool to use
for finding retracement and rebounds, as it is great for detecting
overbought/oversold markets. As the RSI prints above 70 or
below 30 (the lower the number, the weaker the market), you could say
that the market is overbought or oversold. So be careful when
markets become overextended! Do not get caught in a “FOMO” moment! In an
uptrend, a great buy entry signal would be to wait for RSI to drop to the
30 level before buying. Similarly, in a downtrend, a great short entry
signal would be to wait for RSI to rise above 70 before selling. Though
the RSI can be used in any timeframe the trader wants, we recommend using it on
the daily and longer timeframes. The signals generated from these longer
timeframes are more relevant for using RSI as an entry/exit indicator for
swing trades. Bollinger bands are a great tool for measuring market
volatility. Volatility is a measure of variability of price within
a certain timeframe. When markets are said to be volatile, prices can change
drastically in a short time. The reverse is true. When markets are not
volatile, price movement is sluggish and tends to stay within a certain range.
Bollinger bands indicate volatility through the use of thre lines: an SMA of
price and an upper and lower band. The upper and lower bands represent a
standard deviation variable more or less than the SMA. The default
setting of the standard deviation variable is two, which means that the
upper band is two standard deviations more than the SMA, and the
lower band is two standard deviations less than the SMA. Bollinger bands are
effective in detecting overbought and oversold conditions. As the upper and
lower bands are calculated using two standard deviations as a default, there is
a 95% chance that price will remain within the bands. Hence, when price pushes
at the outer bands, there is a good chance that a retracement will occur. The
moving average convergence divergence (MACD) is an indicator that
is composed of three different visual plots: The MACD line shows the difference
between two different exponential moving averages of price, defaulted to
12 and 26 periods. This means that when the MACD Line is above 0, the 12-EMA is
above the 26-EMA, and when the MACD Line is below 0, the reverse is true. Hence,
when the MACD Line is moving upwards, it usually indicates upward
momentum on price. The signal line is the moving average of the
MACD Line, defaulted to nine periods. When the MACD crosses the signal
line from the top, it can indicate a slowdown of upside momentum, and can
be interpreted as a bearish signal. When the MACD crosses the
signal line from the bottom, it can be interpreted as a bullish
signal. Lastly, the histogram depicts the difference between the
MACD line and the signal line. When the MACD line is above the signal
line, the histogram prints in the positive and the reverse is true when the MACD
line is below the signal line. The MACD indicator is a great tool to depict
momentum and changes in momentum. The MACD is also a great oscillator, and can
be used to detect overbought and oversold conditions. Use the change in the
histogram (from positive to negative or vice versa) to generate buy/sell
signals. The MACD can be especially useful when used in combination with a
larger trend indicator to assist in triggering entries and exits. This
article is intended to be used and must be used for informational
purposes only. It is important to do your own research and analysis before
making any material decisions related to any of the products or services
described. This article is not intended as, and shall not be construed as,
financial advice. The views and opinions expressed in this article are the
author’s own and do not necessarily reflect those of CoinMarketCap.