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Crypto Economic Indicators for advanced traders
Swen Keller
In the crypto world Swen has consistently found success through his effective communication skills and the unique ability to navigate the details.
Crypto indicators provide traders with data with the information they need to understand the real-time conditions of the crypto markets. It allows them to make predictions regarding future movements in financial markets. Technical indicators are actively used to analyze changes in cryptocurrency market trends and average price movements of new coins or tokens.
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Some indicators apply to both traditional markets and the cryptocurrency ecosystem, such as moving averages, moving average convergence divergence (MACD), and the relative strength index. On the other hand, other indicators are crypto-specific, which include the fear and greed index. In this article, we will discuss what economic technical indicators are and their different types. Additionally, we will look into some of the most used economic indicators.
What are Crypto Market Indicators?
Technical indicators are tools used by crypto traders to assist them in making trading decisions based on the current market sentiment. These tools are graphs and formulas used to express the direction of the market. This analysis is based on past data to decide what the prices of digital assets will look like in the future. Traders will use indicators to discover repetitive patterns that can confirm predicted trends.
Indicators are generally not absolute in the data they provide to investors. They give you a basic idea of the probable shifts in interest rates and market sentiments. Still, there is no guarantee that the price will move in that direction. Depending on the trading platform you choose, factors such as liquidity and slippage also have an impact on the movement of prices. We will discuss the difference between leading and lagging indicators.
Leading Indicators
A leading indicator depends on the historical price of asset classes to make predictions regarding future price movements. Typically, these types of indicators are beneficial for traders when they want to enter a trade at the start of trends. Conversely, these indicators can show trends at the wrong time and fake breakouts. They can also show signs of reversal that can turn out to be minor corrections. Leading indicators support traders to identify key levels, allowing them to go after more profitable trades.
Lagging Indicators
There is a fundamental correlation between leading and lagging indicators. They both depend on previous price data. Moves will only be reflected after they have occurred because they lag behind the market. In macroeconomics, inflation serves as a prime example of a lagging indicator of economic growth.
Lagging indicators are beneficial in crypto trading since they confirm price action and reduce the possibility of falling for fake breakouts. This allows crypto investors to place transactions with more confidence. However, because lagging indicators don’t have the same concept of crucial levels as leading indicators do, traders may miss ideal entry points.
Important Economic Indicators in the Cryptocurrency Markets
A single indicator can’t provide an in-depth technical analysis. Therefore, crypto investors need to utilize multiple factors simultaneously to get the best investment advice. Most experts advise selecting a few tools available in the crypto ecosystem to analyze market sentiment. As a result, chart clutter is reduced and makes data analysis clear and concise. These indicators are beneficial for crypto assets with smaller market capitalization. We will be discussing some of the most popular technical indicators.
Moving Averages
Moving averages are one of the most direct tools used for technical analysis. It is the average price of a digital asset over a particular period. They express an asset’s upward or bullish trends, such as currencies or commodities. Subsequently, they show a downward or bearish trend for these as well as other crypto assets.
Moving averages are an example of lagging indicators. This is because they display a delayed response to changes in cryptocurrency prices that have already occurred. The simple and exponential averages are the most widely used patterns in the crypto market.
Simple averages are helpful for long-term traders as they capture trends that don’t have sudden shifts. In contrast, exponential averages are a better fit for short-term investors who place a greater significance on recent price data. These statistics will discover price changes more quickly compared to simple averages. You can use moving averages for any time, but the 20, 50, and 200-period averages are used the most. You can determine the general trend digital currencies will take depending on the period dataset you choose.
The 200-period simple average is the average closing price of a cryptocurrency asset over the previous 200 days. It is calculated by averaging the closing prices and dividing the result by 200. It is designed for long-term traders who wish to spot upward or downward trends and receive a clear picture of support and resistance levels. If the average value is above 200, the trend is bullish. On the other hand, if the value is below 200, then the trend is bearish.
Crypto technical traders frequently use the 50-period average. It helps identify support levels in uptrend markets and resistance levels in downturn markets. The 50-period average is the price average paid by investors for a cryptocurrency over the precious ten trading weeks, and it is commonly used as a support level.
There is a direct correlation between the 200 and 50-period averages in the form of death and golden crosses. If the 50 average crosses the 200 with the trend having an up-to-down shift, then it signals a death cross that shows a decline in the market. Inversely, if the 200 and 50 averages cross with a down-to-up trend, this is referred to as the golden cross. This indicates that a bearish trend could be approaching the crypto markets.
The 20-period simple average is more valuable to day-to-day traders due to its high volatility and its reduced timeframe. It measures the average prices of crypto assets across 20 days. This tool can deduce the low-level buildup before a breakout takes place. This allows investors to react quickly to sudden price movements and trade breakouts in crypto markets more efficiently and accurately. However, due to its short-term nature, this indicator can give false signals such as bear or bull traps.
MACD
The moving average convergence divergence indicator is one of the most popular cryptocurrency market analysis tools. It is a simple momentum indication that is good for buying and selling currency. MACD divergence expresses the shift of two moving averages away from each other. In contrast, convergence refers to two underlying averages coming together.
This trend-following momentum indicator will indicate a trend and its momentum. The momentum refers to the probability of rising prices to keep increasing and the possibility of falling prices to keep decreasing. It will reveal changes in the crypto ecosystem trends regarding momentum, direction, strength, and duration.
MACD is the difference between a long period of exponential averages and a short period. The 26 and 12-period EMAs are the most significant in bitcoin blockchain digital currencies trading. All the calculated averages allow you to create a MACD line, which can give you essential buy and sell signals. If the MACD is more significant than zero, it is positive and suggests an upward trend. This indicates that it is an excellent opportunity to buy. If it is less than zero, it is negative, which means a downward momentum. This indication tells traders that it is a good chance to sell.
Moving average convergence divergence indicator charts are ideally used to understand the strength of a trend. As an example, if a price chart is showing high highs, but the MACD is showing lower highs, it can signal that the crypto market value is expected to experience a downward trend. This is generally because cryptocurrency prices are increasing; however, the momentum is decreasing.
Relative Strength Index
In recent years, the Relative Strength Index has gained popularity as an economic indicator among cryptocurrency traders. This index is often confused with the dollar index, which is a measure of the strength of the US dollar compared to other international currencies. RSI is made up of 3 lines, with the middle line acting as the actual indicator. The central line is used to determine if an asset is overbought or oversold. Additionally, the RSI ranges from 0 to 100, and it is based on the recent 14 periods. The average of the upward and downward price shifts is used for the calculations.
An RSI number of 30 indicates that a security has been oversold while a value of 70 would express that a currency has been overbought. According to the relative strength index, an overbought asset is trading at the top one-third of its price range. RSI can be a noticeable investment indicator due to its accurate measurement of the strength of up and down movements.
Despite its benefits, there is no guarantee that the price will shift once it hits an RSI of 30 or 70. Working with market sentiments without any sudden price movements makes the calculation of RSI more accurate. This is due to RSI becoming unreliable as the price is climbing since it becomes more challenging to determine the top price. RSI is generally used in combination with MACD by most traders.
Bollinger Bands
Bollinger bands are technical indicators that are used to determine the price and volatility of crypto transactions. This analysis tool is constructed from 3 different components, which include a simple moving average, a lower bar, and an upper bar. The bars are mostly two standard deviations away from the simple averages. Standard deviations are utilized to discover the difference between a group of prices and the average price.
Moreover, in the event the prices are in a small trading range, the standard deviation will lead to a low number. This expresses a low volatility, which makes Bollinger bands an excellent signal for volatility. The upper Bollinger band represents a positive standard deviation. The area under this band represents an unusual price increase and displays that the asset may be overbought.
Inversely, the lower Bollinger band represents the negative standard deviation. The area under the band shows the presence of unusual price drops, and the asset is oversold. If the distance between the bands is expanding, it illustrates that the market is becoming more volatile. Subsequently, the area between the bands is shrinking, and the market volatility is decreasing.
Fear and Greed Index in Crypto
The Fear and Greed index gauges market volatility and compares it to the last month’s average. The index uses weighted data sources to construct a number starting from zero, which represents extreme fear. The constructed value is below one hundred, which means excessive greed. This figure represents the overall sentiment of the cryptocurrency market.
The index is based on the assumption that cryptocurrency investors are temperamental and emotional as a group. Rising markets stimulate impulsive buying behavior motivated by greed. When markets are dropping, the index implies that many people will act irrationally and sell their cryptocurrency out of panic.
By offering coin and token data that assist in explaining emotion-driven market patterns, the index hopes to shield investors from these irrational trading decisions. However, these decisions can be beneficial for other traders. For example, severe fear may indicate that investors are concerned, indicating a potential purchasing opportunity. On the opposite end of the scale, overwhelming greed may suggest that a market correction is on the way.
Conclusion
Using a combination of economic and technical indicators provides traders with the necessary information and the appropriate tools to make better-informed trading decisions. It increases their understanding of market changes and prepares them to respond to them effectively. Economic indicators will continue to be a valuable tool for cryptocurrency investors in the future.
With the development of the crypto markets, traders will rely on indicators to assess market conditions, discover investment opportunities, and set up appropriate risk management strategies. Regular monitoring of economic indicators is vital for long-term success in the crypto ecosystem.
FAQ
Most frequent questions and answers
Yes, macroeconomic factors can have an impact on cryptocurrency markets. Interest rate changes, inflation, economic stability, and the regulatory environment all have an effect. Furthermore, market sentiments, worldwide adoption, and technological breakthroughs all have an impact on cryptocurrency prices.
It’s important to note that the strength of correlation varies amongst cryptocurrencies. While Bitcoin is frequently regarded as an inflation hedge, other considerations unique to each cryptocurrency also come into play. Essentially, both crypto-specific and more prominent economic factors influence crypto market behavior. This makes it critical for investors to examine a variety of elements in their decision-making process.
Your unique trading approach and objectives determine the most valuable indicators for crypto trading. Indicators such as moving averages, the Relative Strength Index (RSI), moving average convergence divergence, and Bollinger Bands are widely employed.
However, it’s crucial to remember that no single indication guarantees success. Combining indicators with other elements, such as news events and market mood, can provide a more well-rounded approach to cryptocurrency trading. Furthermore, backtesting any chosen indicators is critical for determining their effectiveness in different market scenarios
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