Cryptocurrency Trading: Technical Analysis
Cryptocurrency trading is an activity performed by many in the ecosystem. Being aware of these trading tools is an important step in becoming a well-rounded cryptocurrency trader.
Relative Strength Index (RSI)
RSI measures the strength and speed of a market’s price movement by comparing the current price of a cryptocurrency to its past performance.
RSI compares the magnitude of recent gains to recent losses in an attempt to discern if a particular cryptocurrency is overbought or oversold.
The RSI ranges from 0 to 100. A cryptocurrency is said to be overbought once the RSI starts to approach 70. This suggests that the cryptocurrency is getting overvalued and so may soon experience a pull back. Conversely, if the RSI approaches 30, this is an indication that the cryptocurrency may be oversold, and thus is undervalued. This indicates that the cryptocurrency may be subject to a breakout at some point soon.
RSI is useful indication for when a market will reverse. However, false buy and sell signals can be created by large rallies or drop in the price of a cryptocurrency. This is where it becomes incredibly important to combine the RSI with other trading indicator signals.
The Moving Average Convergence/Divergence (MACD) Indicator
The MACD indicator is made up of two exponential moving averages that help measure momentum in a cryptocurrency by using the difference between short-term and long-term price trends to help predict future trends.
These two moving averages, and the distances between them, become the moving average convergence/divergence (MACD).
Convergence simply means that the two averages are moving closer to each other, and divergence that they are moving further away from each other.
A Bollinger band is simply a moving average with two standard deviations plotted from it on either side. Standard deviation is simply a measure of market volatility and so Bollinger bands help account for volatility in a cryptocurrency.
When the cryptocurrency is a more volatile, the Bollinger bands widen, and move further away from the average. During periods of reduced volatility, the bands contract and move closer to the average. Thinner bands indicate that the market may soon experience large amounts of volatility.
When the price approaches the edge of the band, it is likely the price will reverse and come back within the range of the Bollinger bands, traders can use this as a signal to buy or sell a cryptocurrency.