Digital money, also called the cryptocurrencies, is the latest development in the digital money domain. Like FX and stocks, Crypto currency trading is also speculative. It is decentralized and the prices are determined by the forces of demand and supply. Since it’s a global market, transactions can be made from any part of the world to another. This probably has already given you a hint about why you need trading indicators and charts, in case; you want to trade in the cryptocurrency. These are the tools that help you understand how is the market behaving and to spot investment opportunities. However, let us also understand that a market as volatile as Cryptocurrencies, can never be predicted precisely.
Every trader uses some kind of an indicator or a chart, to make strategies and plan his trading likewise. Kishore M, an Crypto and FX expert, talks about strategies, saying “In Crypto trading, as a new trader, learn the tools. They are your friends in trading which will define your dominant trading style”.
Here is a list of some of the most common trading indicators and charts, that traders across the globe prefer and use.
Relative Strength Index RSI:
An oscillating average indicator, the intent of this indicator is to predict if a currency is overbought or oversold.
Oscillating between 0 to 100, RSI is calculated as
RS = AVERAGE GAIN / AVERAGE LOSS
RSI uses the simple logic of falling price to indicate that the time is ripe for buying. The rule that this indicator follows is that if the RSI is above 70, the prices will fall as the currency is overbought. On the other hand, if the RSI drops below 30, the prices will rise as the currency has been oversold.
Directional moment index or DMI:
DMI is similar to RSI. Both the indicators try to indicate price trends. DMI is used to spot trends to make a decision on the correct time to enter or exit the market.DMI uses three curves to trace the price trends: ADX, DI+ and DI-. DI+ and DI- use history to predict the future patterns. The indicative lines traced by these two curves are converted into a comprehensible exponential moving average by ADX
Stochastic Oscillator is akin to RSI. This indicator uses the same average as RSI, ranging from 0 to 100. The only difference is that here the values are set at 80 and 20. When the oscillator moves above 80, it shows that a currency has been overbought, hence the prices will fall. When the oscillator moves below 20, it shows that the currencies have been oversold and therefore the prices will rise.
Moving Average Convergence Divergence:
Considered one of the easiest and precise indicators, MACD, uses a three indicator average to understand and make predictions about the market price. Here, traders use two EMA one indicative of short-term and the other indicative of long-term. These two averages, called the Exponential averages are set at the periods of 12 days and 26 days, signifying short term and long term settings. They are analyzed along with a signal line, which is set in between the short and the long-term averages.
Simple Moving Average or SMA:
Simple Moving Average or SMAs are average indicators that calculate price trends within a specific time period. An SMA will calculate the average by capturing the recent closing prices and then divide the same by the number of time periods.
Named after the man, who devised this indicator, John Bollinger, is an interesting indicator. This indicator does not operate on its own. Rather it is drawn over the price indicators. As and when the prices fluctuate, the Bollinger bands would expand and contract. For instance, if you are investing in a particular pair of currencies and the prices of the same fluctuate, the bands will contract and expand likewise.
On-balance Volume indicator (OBV):
OBV takes in the information on the volume of trade and interprets it a single line Bollinger Bands indicator. This is almost precise since the volume of trade can be an undeniable indicator of what is trending. All that a trader needs to do is to look for the OBV dropping below or keeping steady over the trend indicator.
Relative Strength Index or RSI
Directional moment index or DMI
Moving Average Convergence Divergence
Simple Moving Average or SMAs
Along with indicators, traders also use charts. The importance of these charts can be understood from the fact that there are dedicated FX trading courses, which teach how to read and decipher charts, especially for the new bees, Reading a chart is one of the competencies of a trader. There are a few charts which are popular amongst the traders. The importance Here is a list is of some of the most popular ones.
- Line charts
- Bar charts
- Candlestick charts
Most of us understand these charts as they would look in trading; these charts become the tools based on which traders make trading decisions.
Line charts connect dots which are various closing prices over a period of time. This traces out a pattern, which is then, deciphered and interpreted by the traders. This chart has no other information but only of closing prices. The lines do not move either to indicate any trend.
These charts have more details than a Line chart. The information is represented by lines of different colours. Bar charts show the opening and the closing prices, and any other trend that we may want it to trace.
This charts were originally developed and used by Japanese rice traders, is the most widely chart by seasoned traders. Used for technical analysis, the candles in these charts are shaded in different colours, each representing a specific information.
Charts and trading indicators are tools that enhance trading. These are some of the tools that new traders must acquaint themselves with. All of them are customizable and parameters on most can be refined and redefined, as and when needed.