As more people show an interest in trading cryptocurrencies, it becomes essential to start with the indicators. Crypto traders use various indicators to gauge market sentiment. Below are some critical tools to use, although there are many other options to consider.
Bitcoin Dominance Matters
Bitcoin Dominance is either crucial or useless, depending on whom you pose the question to. Some people see it as a way to determine overall market sentiment. Others consider it an archaic metric only relevant to so-called bitcoin maximalists. Regardless of personal opinions, the Bitcoin Dominance metric is an intriguing indicator that depicts the market cap of BTC compared to the combined market cap of all cryptocurrencies.
Four possible scenarios can ensure where Bitcoin Dominance is concerned:
- Metric goes up, and total market cap rises: positive outlook
- Metric goes down, and total market cap rises: positive outlook, mainly for alternative crypto assets
- Metric goes up, and total market cap decreases: bear market, primarily for alternative crypto assets
- Metric goes down, and total market cap decreases: negative outlook.
Keeping an eye on the Bitcoin Dominance – on Tradingview or data aggregators like CoinGecko – is always valuable. Gauging the overall industry sentiment will help make well-informed trading decisions for bitcoin and alternative crypto assets alike.
Moving Average (50D and 200D)
A common metric in any trading environment is the moving average. More specifically, the moving averages that depict price trends over longer periods. Although some traders prefer to use the 20D, 50D, and 200D moving average, it is the latter two that everyone should pay attention to. A lot can happen in 20 days, yet that will not necessarily affect the overall long-term trend over 50 or 200 days.
A 200D moving average shows the price over the past 200 days. It is incredibly versatile for identifying potential market reversals, uptrends, and downtrends. When paired with other indicators, users can figure out possible support and resistance areas. The easiest way to make money is by looking for markets with prices above the 200D moving average, which indicates a bull market.
The chart below shows the 200D moving average (yellow) and the 50D moving average (purple). Despite a current negative price trend, it confirms the 200D MA is still going up, ensuring bitcoin remains in an uptrend. However, the 50D MA confirms there may be some pushback in the short term, yet the overall uptrend has yet to be broken.
Using the 50D moving average is a powerful tool to determine whether market reversals are nigh. It provides a shorter overview of current uptrends or downtrends. Moreover, if the 50D MA and 200D MA cross, there is – traditionally – a bear market (50D crossing over 200D) or bull market (200D crossing over 50D). No imminent cross will occur for bitcoin on the 1W chart, but the 1D chart shows a clear bear market.
Relative Strength Index (RSI)
For traders, the Relative Strength Index serves a simple purpose. The RSI depicts whether an asset is overbought or oversold, resulting in either bullish or bearish market sentiment. Should the RSI rise above 70%, the asset is on the cusp of being overbought, warranting a slightly bearish outlook. Conversely, an RSI below 30% indicates an oversold market, warranting a more positive outlook.
As the image above depicts – look at the area below the price movement – bitcoin neared the 70% RSI range a few days ago, and the market promptly decreased. However, it recently bottomed to 33% and yielded a small bounce, but is now slowly returning toward that 30% range. The coming days may prove crucial to determine if an uptrend is likely or the bear market will remain in place.
Bollinger Bands (BBs)
When dealing with bitcoin or other cryptocurrencies, volatility is to be expected. Thankfully, the Bollinger Bands help users measure market volatility. Using Bollinger Bands pairs well with the RSI to see how overbought or oversold markets may be. Additionally, the BBs provide a 20-day simple moving average, which may prove helpful to gauge further short-term price fluctuations.
As the distance between the lower and upper Bands increases, there is more market volatility. If the price touches the upper Band during any period of volatility, there will likely be a reversal. The same applies to prices touching the lower Band. It is not abnormal to see prices break out of the Bands altogether with crypto assets. Such unusual market conditions will not last long, though.
The Bollinger Bands above (gray upper Band, light blue lower Band) illustrate the scenario well. Prices near one of the Bands and the market quickly goes in the opposite direction. Moreover, the 20D MA is on the cusp of creating a bearish cross with the 50D MA unless something changes in the next few days.
All of the market indicators above do what they are designed to do: indicate current market sentiment. Unfortunately, it is not an exact science, and no indicator should be used on its own. Combining multiple indicators can provide var better insights, yet that overall picture may be deceiving. Cryptocurrencies are notoriously volatile, and markets are open 24/7, making it more challenging to make accurate assessments.
Furthermore, there are a few other indicators traders may want to experiment with. We will cover those in an upcoming article related to cryptocurrency trading.
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