Cryptocurrency day trading is a short-term strategy for trading based on buying and selling crypto assets on the same day.  Day trading is highly risky owing to the distinct liquidity and volatility of the digital assets market. The venture started out across traditional markets and has now become a household name in crypto. However, unlike traditional markets, trading crypto requires deeper knowledge of blockchain tech. 

Day trading usually relies on frequent short time frames and the trading of more than one asset throughout the day. Buy-and-hold trading on the other hand involves purchasing and holding assets for the long term. Meanwhile, a day trader is only interested in immediate profit-making by the close of the day. 

The success of a day trader relies on their ability to combine different resources, tools and indicators to form their own methodology and plan out their risks. It is somewhat difficult to capitalize on short-term price movements, hence a certain level of risk is always involved. 

In this article, we will discuss the main indicators for crypto day trading. An understanding of blockchain technology is crucial before you invest in cryptocurrencies. Also remember this is not trading advice, and you have to conduct your own due diligence in order to build impeccable risk management strategies. Below are the best indicators for day trading cryptocurrencies: 

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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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. 

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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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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. 

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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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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. 

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Pros and Cons of Day Trading Cryptocurrencies

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