In this article, we are going to look at the hottest technical indicators for trading cryptocurrencies. We will evaluate both the pros and cons for each indicator and help you determine whether it’s a good one for your trading strategy. Let’s get started with the best crypto trading indicators of 2022: 

Relative Strength Index (RSI)

The Relative Strength Index is a technical indicator for measuring the strengths and weaknesses of an asset during price movements. The RSI’s primary goal is to evaluate whether an asset is oversold or overbought. 

The calculation formula for the Relative Strength Index is: 

RSI = 100 – 100/1+RS

This indicator measures the average periods that the price of the asset closes high and divides them by the average periods at which the prices fall. The default setting is 14 candlesticks or periods, however, you can adjust the periods depending on your level of customization. When the relative strength index is below 30, the asset price is said to be in the oversold region. When the relative strength index goes above 70, the asset is considered overbought.

Advantages and Disadvantages of Relative Strength Index

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Stochastic Oscillator

Stochastic Oscillator measures changes in momentum by comparing a particular asset’s closing price with a wide range of prices within a specific time frame. This indicator usually generates oversold and overbought trading signals using a particular range of price values. The stochastic oscillator is derived using the following formula:

Slow %K= 100 [Sum of the (C – L14) for the %K Slowing Period / Sum of the (H14 – L14) for the %K Slowing Period] Slow %D = SMA of Slow %K

The main advantage of the stochastic oscillator indicator is one does not have to compute it manually. A reading above 80 indicates overbought price conditions, while a reading below 20 indicates oversold price conditions. We recommend using the stochastic oscillator in a range-bound environment. 

Advantages and Disadvantages of the Stochastic Oscillator

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Bollinger Bands Indicator

The Bollinger Bands Indicator help determines if a market is within a particular band of normalcy. The upper and lower bands of the Bollinger bands indicator move in line with changes in price. Through the bands, users can measure the default 2-standard deviations. This is the point where at least 96+ per cent of price fluctuations take place.

A price reversal could take place when the price of an asset moves beyond the upper or lower bands. The Bollinger Bands are a widely used indicator in both the stock market and the cryptocurrency market. They are a perfect method for determining asset markets that have fluctuated too far. 

However, note that the Bollinger Bands Indicator is used alongside a combination of other indicators in order to become more reliable. Here is the formula for calculating the BB: 

Advantages and Disadvantages of using the Bollinger Bands

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Moving Averages

Moving averages are the most popular trading indicators in both digital assets and traditional stock markets.  A moving average tracks down the closing prices for a particular amount of candlesticks and determines an average. For instance, a 100-moving average plots the average closing prices of the previous 100 daily candlesticks. The calculation usually shifts forward every time the charts print a new candlestick.  This is to ensure that the Moving Average indicator only measures the previous 20 candlesticks. Meanwhile, traders could decide to customize their own MA and set the candlestick period to either 9, 20, 50, 100 or 200.

There are 2-types of moving averages. The Simple Moving Average and the Exponential Moving Average.  The Exponential Moving Average puts more emphasis on the most recent candlesticks. Therefore making it is more sensitive compared to the Simple Moving Average, which is only a basic calculation of the last X amount of closing prices. 

The role of the Moving Averages is to provide an overall trend or help determine dynamic support zones and resistance levels. You record an uptrend when the moving average descends from the lower left to the upper right. For a downtrend, the moving average descends from the upper left to the lower right. 

Moving Average is considered the very best cryptocurrency technical indicator. Technical analysts mostly prefer it for measuring price fluctuations across the Bitcoin market. The calculation formula for Simple Moving Average is: 

A1 + A2 +A3, etc./n

Advantages and Disadvantages of Moving Averages

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Fibonacci Retracement

The Fibonacci Retracement Indicator makes predictions of the resistance and support zones of a given asset. This indicator is complicated to use at first, but completely easy once you get the hang of it. The good thing about the Fibonacci Retracement level is its ability to help you understand the price actions of the market. A rule of thumb is there are only 3-levels of retracement that analysts should consider 38.2%, 50% and 61.8%.

An analyst utilizes the retracement of the above percentages to locate potential opportunities during a price trend. The indicator is convenient for both uptrends and downtrends. One advantage is that most global traders provide charting for the Fibonacci Retracement tool. The calculation formula for the Fibonacci Retracement tool is the following: 

UR = High Price – { [ High Price – Low Price ] * Percentage

Point of Note: The above formula is used during an uptrend. When measuring a downtrend, replace the initial high price with a low price.

Average Directional Movement Index

The Average Directional Movement or ADX is an indicator for measuring the overall strength of a given trend. ADX measures the average of the rising range of fluctuating prices throughout a trend. The indicator picks the mean values through a particular period. When the ADX goes above 25, the trend is strong. When the ADX goes below 20, the trend is either weak or there is no present trend at all. 

A decline in the average directional movement index shows a weakening trend. A rising ADX indicates a strengthening trend. The formula for calculating the ADX is as shown below: 

ADX = MA [((+DI) – (-DI)) / ((+DI) + (-DI))] x 100

Where

Advantages and Disadvantages of the Average Directional Movement Index

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Aroon

The Aroon indicator is a tool for measuring a trend’s strength as well as analysing changes in the price of an asset. The indicator tracks down the period between both highs and lows within a given period. Aroon is calculated as shown below: 

This calculation tracks the low and high prices over the previous 25 candlesticks. Measuring the number of periods between the previous lows and high helps determine whether the calculation is accurate. Once you identify those highs and lows, use the above-mentioned formula to determine the strength of the trend and the price fluctuations. 

A bullish action takes place when the Aroon Up line is above the AroonDown line. A bearish price action happens when the Aroon Down Line is above the Aroon Up Line. 

Advantages and Disadvantages of using the Aroon Indicator

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Ichimoku Cloud

The Ichimoku Cloud is a combination of other indicators for displaying potential zones of resistance and zones of support in the market. The indicator also shows both momentum and trend direction. Note that the Ichimoku Cloud tracks multiple averages and plots them on the chart. The indicator then goes on to use the values to create a cloud for predicting the time when an asset’s price will reach support or resistance. 

Ichimoku Cloud has 5 lines, and each of the lines has its own formula: 

Where

PH = Period high

CL = Conversion line

PL = Period low

Advantages and Disadvantages of the Ichimoku Cloud

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On Balance Volume (OBV)

On Balance Volume or the OBV tracks down the volume flow of an asset so as to predict possible price fluctuations. One advantage of the OBX is its ability to determine a signal buy/sell strength. The indicator is classified among cumulative indicator tools – when an asset’s price closes higher for a given candlestick,  that day’s volume is added to the On Balance Volume reading. When an asset’s price closes down, that day’s volume is subtracted from the total.  No calculation takes place when the price remains unchanged. Meanwhile, the On Balance Volume Indicator works well for analysing Bitcoin. 

Advantages and Disadvantages of using the OBV Indicator

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Moving Average Convergence/Divergence (MACD)

The MACD is a widely used indicator. Most people love it for its straightforwardness and easy-to-use nature. The indicator is a trend-following tool and is used to provide strong trading signals across both crypto and stock markets. MACD measures if the direction of a short-term and long-term momentum is the same or not. There are four components that are put into consideration when determining the MACD: MACD line, signal line, zero line and the histogram. 

The calculation for the MACD is as shown: 

26-period Exponential Moving Average – 12-period EMA (at closing prices)

When the reading is positive, there is an upside momentum. When the reading is negative, there is a downward momentum. 

Advantages and Disadvantages of the MACD

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Conclusion

The above indicators come in handy for traders who want to build a  trading strategy and profit from it. There are different strategies and each strategy takes into consideration a combination of any of the above technical indicators. Take time to research, learn and test each of the indicators. This will help you form your own methods, and actionize your trading strategy.