My Top 3 Favourite Indicators for Technical Analysis of Cryptocurrencies

Nota bene:

This is not financial advice and I am not a financial advisor. I’m sure there’re plenty of licenced professionals in your jurisdiction. Speak to them, not strangers on the internet with Hyman Minsky avatars.

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A few general remarks before I go through the list:

I) You don’t need to use indicators to trade successfully. There’re plenty of traders who chart ‘naked’ i.e. without any indicators and do so with tremendous success. That being said, indicators can certainly be helpful and supplement your analysis.

II) Less is more. Namely, in my experience the more successful traders are not necessarily those who know how to use and interpret the greatest number of indicators, but rather those who have truly mastered a couple of indicators and use them to their full potential.

III) I would strongly advise against using any indicator as a crutch. If you’re unable to interpret price action and unable to find trade setups solely by looking at an empty candlestick chart, then you have no business using indicators which automate and map support and resistance for you. I sincerely believe that one is better served by learning price action first and using that as the basis of one’s technical analysis, and then adding the ‘fluff’ indicators afterwards to see if there’s any confluence.

IV) Just because I didn’t include an indicator in this list doesn’t mean I think it’s a bad indicator.

Without further ado, let’s get into my favourite indicators, why they’re my top picks, and how I use them.

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3. Ichimoku Cloud

What it is

Ichimoku Kinko Hyo, also known as the Ichimoku Cloud or simply as Cloud, is a ‘complete’ indicator which uses moving average data to show the trend of an instrument, the strength of that trend, dynamic areas of present and future support and resistance, and more.

Why I like it

I see the Ichimoku Cloud as a more powerful and complete version of MAs (Moving Averages) or EMAs (Exponential Moving Averages).

While (E)MAs also show MA crosses and indicate possible areas of support and resistance, Cloud does a lot more.

It shows more areas of support and resistance (Senkou Span A & and Senkou Span B), it can show targets for long/short positions in the case of an edge-to-edge trade (flat Kumo or just opposite edge of the Kumo Cloud), it gives breakout areas (Kumo breakout points), it can help you determine how much conviction to have in a position (TK cross relative to Cloud), and more.

The list goes on.

In short, it is like using (E)MAs on steroids.

How I use it

The first thing I do is adjust the inputs on the Ichimoku Cloud to 20/60/120/30 to better reflect the fact that cryptocurrency markets operate 24/7 (see below).

If I am looking at an altcoin which doesn’t have enough price history for the Ichimoku Cloud to work properly, I will reduce the settings to 10/30/60/30.

Adjusted settings for using the Ichimoku Cloud.

I use the Ichimoku Cloud in two main ways.

I) To see the direction of the macro trend. This is done by looking at price in relation to the Kumo Cloud on a high time frame like the 1D. At a glance, I can tell where the current trend is, how strong it is, and when it started/the last one reversed.

2. To find confluence with areas of support and resistance that I already have on my chart. This is the most common way in which I use the Ichimoku Cloud. Namely, I will draw my lines/levels of support and resistance first, and then overlay the Ichimoku Cloud to see if any of my lines have confluence with the indicator e.g. a support line which lines up with the Kijun line will make me more confident about that support level holding, and the same applies if I were to have a resistance line which lines up with the top boundary of the Kumo Cloud i.e. the bullish Kumo breakout point.

If you have no idea what any of that means but you’re interested in learning more about how to interpret and use this indicator, I kindly refer you to

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2. Relative Strength Index (RSI)

What it is

The Relative Strength Index (henceforth ‘RSI’) is a momentum oscillator which measures the speed and change of price movements.

In much more simple terms, this indicator is used by traders to get an idea of whether an instrument is overbought or oversold (though, as you will see, it is capable of doing much more than that).

Why I like it

I like the RSI because it appears to be a very straightforward indicator, but when used to its full potential, can convey a lot of information and generate very powerful and diverse trading signals. In other words, I like it because many cryptocurrency traders misuse it and only rely on overbought/oversold signals, not realising what else it is capable of.

Another reason I like the RSI is because it can be used as a sort of all-in-one oscillator, thus relieving me of the need to add 3 different oscillators and clutter my chart just to get an idea of the strength of a trend.

How I use it

I use the RSI in two main ways.

I) To identify market tops/bottoms and trend reversals by looking out for divergences. A divergence is when the highs/lows made by the RSI are different from the highs/lows made by the price. This is the most powerful and central use case of the RSI. Period. The founder of the RSI called divergences the “central characteristic of the Relative Strength Index” for a reason.

Standard bearish divergence on BTC/USD marking the market top.

II) To fine tune my entries and exits. Once I’ve identified a setup, I sometimes elect to base my exact entry and exit on a smaller time frame like the 15M or 30M. Having identified my ideal entry and exit zones in advance, once/if price reaches that zone, I will seek to enter when the RSI is oversold across lower time frames and I will seek to exit when the RSI is overbought across lower time frames.

Please read (II) carefully. I do not take trades purely based on RSI being overbought/oversold. What I am saying is once I’ve already identified a zone where I want to enter/exit, and price is in that zone, I will use the RSI on low time frames to enter around my predetermined range when an instrument is oversold and to exit around my predetermined range when an instrument is overbought.

If you’re unsure how to identify an RSI divergence, or want an in-depth explanation of this indicator more generally, I kindly refer you to

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1. Volume

What it is

Volume is an indicator which depicts the amount that an instrument was traded over a period of time.

Why I like it

I like the default volume indicator (shown below) as well as other volume-based indicators such as the VPVR, the OBV, et cetera.

This is because volume, in my opinion, is the strongest tool that traders have to confirm their interpretation of price action.

In other words, volume supplements traders’ interpretation of price action. The next section will make this more clear.

Default volume indicator on Tradingview.

How I use it

I use volume in two main ways.

I) To confirm the validity of a chart pattern. Chart patterns typically have a volume profile which, if met, renders the completion and success of the pattern more likely (see example below). If I’m trading a chart pattern, I check the volume profile to gauge how confident I should be that it will play out as expected.

Excerpt from John J Murphy’s book ‘Technical Analysis of the Financial Markets.

II) To ascertain whether the violation of a major support/resistance area is likely to stick. Put simply: if price is trying to break through a major resistance level, I want to see a sharp increase in buy volume to support such a push. At the same time, if price is trying to violate a major support, I want to see a corresponding increase in the sell volume at the same time. Thus, I use volume to ascertain whether there’re enough buyers/sellers in the market to break a major resistance/support/

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Thanks for reading my article and I hope you’ve found it helpful.

I post charts and other technical analysis insights on my Twitter and in my Telegram channel.

My full-length technical analysis lessons, which are all free, can be found here.

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Until next time!

Cred