Cryptocurrency trading has evolved from the perception of simply being a game of chance to a strategic process. Successful traders rely on a combination of technical analysis, specific indicators and metrics to find trades with a high probability of profit.
Before explaining the three technical analysis strategies that can help confirm a winning trade, let’s first define the key terms:
- Technical analysis — is all about analyzing statistical trends, so as long as an asset has historical data, technical analysis can be applied. Technical analysis involves looking at the past trading activity and price variations of a crypto asset, with the goal of understanding how the supply and demand of a specific asset might influence its future price changes. By using charts to evaluate price trends and patterns, it’s often been possible to find profitable trading opportunities.
- Indicator — is a tool that helps traders make decisions in the market. Select indicators on cryptocurrency market charts are used to measure different aspects of market activity. Ultimately, traders use them to try and predict potential future price movements.
The three indicators for crypto trading examined here are:
- Relative strength index
- Bollinger Bands
- Moving average convergence/divergence
The key distinction lies in the strategy used to apply what these indicators point to in the market. Below are some best practices on how to use them.
Relative Strength Index
The relative strength index (RSI) measures momentum — whether an asset is overbought or oversold. It does that by comparing the closing price with the asset’s 50-day moving average.
If the current price of an asset is within 10% of its 50-day moving average and has been trending upward for at least two days, the RSI reading is considered to be above 70, which qualifies as overbought; on the other hand, an RSI reading under 30 is thought to be oversold.
A strong upward RSI momentum tends to point to an impending rally.
Look specifically for this type of RSI divergence: two lows, where the first low is higher than the next low, followed by an RSI where a lower low is followed by a higher low. Such a divergence signifies a potential change in momentum, meaning that a sizable upside could be happening soon.
Bollinger Bands can be used to determine an asset’s relative high and low price over a set period by using a common statistics metric known as standard deviation.
By plotting bands two deviations above and two deviations below a moving average, typically 20 days, traders can use historical data to compare it to the current price.
Try using Bollinger Bands to identify breakout price action when an asset’s price moves outside of the upper or lower bands. Prices near the extremes of these bands can be another good confirmation of a winning trade.
Moving Average Convergence/Divergence
The moving average convergence/divergence (MACD) is a trend-following momentum indicator. The MACD line shows the relationship between two exponential moving averages (EMAs) — the difference between the 12-day EMA and the 26-day EMA.
Finally and most importantly, there is the signal line — a 9-day EMA of the MACD line. With the MACD, traders watch the MACD line and the signal line to see if and when they cross over.
When the MACD line crosses above the signal line, it is a bullish indicator that informs traders to consider buying the asset, as this signals a green candle could be coming.
Conversely, when the MACD line crosses below the signal line, it is a bearish indicator that informs traders to consider selling or shorting the asset. Historically, this leads to a drop in asset value.
Using indicators to confirm winning VORTECS™ Score alerts
CoinStreetDaily Markets Pro’s VORTECS™ Score is a quant-style indicator providing a “snapshot” comparison between current and past market conditions for a given crypto asset.
Its artificial intelligence-driven backtesting engine performs real-time analysis on a fixed set of quantitative factors to produce a numeric score that predicts when certain assets may be due an ascension in price: a higher VORTECS™ Score means that current market conditions are bullish, while a lower score is bearish.
Many CoinStreetDaily Markets Pro traders use a certain value of the VORTECS™ Score as a trigger for an entry. Many traders use a value of 75 and over, as 75 is the value at which the VORTECS™ line lights up green on the CoinStreetDaily Markets Pro platform.
However, there is a potential obstacle here: While the VORTECS™ Score offers institutional-grade insight into potential asset movements, its predictability can be vastly improved by pairing it with confirmation from the indicators discussed above.
This principle is inherent to trading rather than the VORTECS™ Score — the more arguments that support a trade idea, the more likely it is to be a winning trade.
For CoinStreetDaily Markets Pro traders who consider a VORTECS™ Score of 75 as a potential entry trigger, here’s how one can use the indicators above to confirm trade opportunities:
1. Using MACD as confirmation of a VORTECS™ Score trigger on ETH/USD.
On Jan. 10, 2021, the VORTECS™ Score on ETH/USD reached 81, triggering an entry setup. An inspection of the price action on the chart shows the trigger was preceded by a MACD fast line crossing over the signal line, a bullish indicator.
By using the MACD as a confirmation tool, astute CoinStreetDaily Markets Pro traders could’ve used the VORTECS™ Score trigger to capitalize on what was the start of the 2021 bull run for Ether (ETH).
2. Using RSI as confirmation of a VORTECS™ Score trigger on DOT/USD.
On Sept. 21, 2021, the VORTECS™ Score on DOT/USD reached 75, triggering an entry setup. An inspection of the price action shows that DOT/USD had just displayed a bullish RSI divergence signal:
DOT/USD had set lower lows (indicated by the slanted blue horizontal line on the price chart), while the RSI had set higher lows (indicated by the slanted blue horizontal line on the RSI chart).
By using the RSI as a confirmation tool, astute CoinStreetDaily Markets Pro traders could’ve used the VORTECS™ Score trigger to capitalize on a near 100% move for Polkadot (DOT) in two months.
3. Using Bollinger Bands as confirmation of a VORTECS™ Score trigger on DOT/USD.
Alternatively, traders using Bollinger Bands could’ve also used the indicator as confirmation for the VORTECS™ Score trigger on Sept. 21, 2021.
DOT’s price chart shows it dipped below the lower boundary of the Bollinger Bands on the same day the VORTECS™ Score was triggered, providing immediate bullish confirmation for the trade.
CoinStreetDaily’s Markets Pro provides traders easy access to institutional-grade tools like VORTECS™ Score triggers and traditional technical analysis. Paired together, these can be the building blocks of creating high-quality, high-probability trades.
See how CoinStreetDaily Markets Pro delivers market-moving data before this information becomes public knowledge.
CoinStreetDaily is a publisher of financial information, not an investment adviser. We do not provide personalized or individualized investment advice. Cryptocurrencies are volatile investments and carry significant risk including the risk of permanent and total loss. Past performance is not indicative of future results. Figures and charts are correct at the time of writing or as otherwise specified. Live-tested strategies are not recommendations. Consult your financial adviser before making financial decisions.
All ROIs quoted are accurate as of February 14, 2023…