Crypto technical indicators: Level up your trading

Crypto technical indicators visually represent the strength of a digital asset by using a mathematical formula to combine a variety of technical data, such as price or volume. While they can be simplistic and reductionist in nature, they offer traders some additional insight into:

• When markets may be at a turning point, such as being oversold or overbought.

• When markets are gaining in momentum, such as after a breakout.

While indicators should rarely be used in isolation, they can add value to both discretionary and systematic traders:

• Discretionary traders often use them alongside a price action focussed system to look for clues about the strength of a market at key price levels.

• Systematic traders often use or create their own indicators which can generate signals as part of an automated trading system.

Want to learn more about crypto trading bots? Check out our dedicated Kraken Learn Center guide here.

Using price chart indicators for the first time may seem like a daunting prospect, but with practice they can become vitally important tools for gaining insights into the crypto market. 

Here are three reasons why you should consider using technical indicators to level up your crypto trading:

1. Traders adopt crypto indicators in a variety of ways, and may use them to try and increase the strike rate of a trading or investment strategy.

2. If you have ever wanted to deploy a trading bot, then understanding how indicators work and how you can create your own will be of interest to you. Even relatively simple indicators can act as the foundation for a trading strategy. With enough backtesting and forward testing, you may even be able to use an indicator to trade crypto markets 24/7 with the help of automation. 

3. Since indicators visualize price and time, understanding how indicators work and when they are useful is a great entry point for new traders seeking to learn more about how crypto markets behave.

At the highest level, all indicators fall into one of two categories:

1. Overlays: These indicators appear over prices on a chart, highlighting potential pivot points and key levels. For example, Bollinger bands are displayed on a chart as lines that wrap around the outer boundaries of price action, and can be used as part of mean-reversion strategy (buying a coin when it becomes oversold in the hope that it bounces).

2. Oscillators: Oscillators are indicators positioned above or below the chart in a separate panel. They visually represent the strength and momentum of price action within a fixed range, oscillating between two extremes. One example is the Relative Strength Index (RSI), which is plotted between 0-100 and can be used to identify when a crypto asset might be overbought or oversold.

Within the above categories, there are two additional sub-types:

• Leading indicators: Indicators that attempt to forecast where the market is going to go next. Example: A bullish divergence on the RSI. This is a visual representation of sellers becoming exhausted, which can signal a reversal in the trend. Note that many signals from leading indicators do not always result in a reversal. In markets with a very strong directional bias, divergences often occur before a weak counter-move or consolidation.

• Lagging indicators: Indicators that generate signals after a decisive movement in price. Example: A Simple Moving Average (SMA) crossover following a breakout from a prolonged period of consolidation indicates market strength, confirming that the price has exited a trading range. While this can validate a trend, it’s less effective for predicting an upcoming move. The challenge with lagging indicators like the SMA is the risk of entering a trade just as the momentum is fading, which could result in the market reversing soon after you take a position.

Finally, all indicators are concerned with one of four technical variables: trend, momentum, volume and volatility.

Below are seven carefully selected indicator profiles, each with details about what they do and how you can use them. The following were chosen based on which indicators have been successfully deployed into automated strategies and are the easiest for beginner traders to use.

Type: Oscillator

Sub-type: Leading indicator

Concerned with: Momentum

• Measures speed and change of price movements.
• Calculates the average gains and average losses over a given period (often 14 bars).
• An RSI of 60 means that price has been going up more than it has been going down, over the period examined.
• An RSI below 30 indicates that price is “oversold.”
• An RSI above 70 indicates that price is “overbought.”
• The 50 level often acts as support and resistance for momentum.

Reversals
By looking at price action when the RSI is either oversold or overbought, you may find clues that price is truly exhausted in either direction. These clues can come in the form of a regular bullish or bearish divergence. In the bullish case, two factors must be present simultaneously: price makes a lower low, but the RSI makes a higher low. As the RSI visualizes the strength of a market, this divergence suggests that despite the lower price, sellers are losing strength, and therefore a reversal may occur. Hidden divergences - which effectively mirror regular divergences in their presentation - can also indicate a reversal. Traders may combine the RSI with price action at a predetermined area of interest, to see if price is behaving as expected. 

RSI-based patterns
Patterns that you find on a price chart can also form on the RSI, and some traders use these patterns to generate signals. For example, the symmetrical triangle is a pattern of price action known to and traded by many traders. It is identified by a series of higher lows and lower highs, as price coils before its next move. The same pattern can also form on the RSI. Once you have identified and drawn the triangle (you can add drawings to the RSI as you would on a price chart), a signal is generated when the RSI breaks out from one of the converging lines in either direction. 

For more information, check out our Kraken Learn Center guide, Crypto trading chart patterns: Master the basics

Type: Oscillator

Sub-type: Lagging indicator

Concerned with: Momentum

• Identifies changes in the strength, direction, momentum and duration of a trend.
• Composed of the MACD line, the Signal Line and a histogram.
• Signals are generated by crossovers between the lines or divergences present in the histogram.
• The greater the distance between the MACD and Signal lines, the greater strength of the implied trend.

Reversals
Like the RSI, the MACD can indicate when a market may be forming a reversal. Recording a divergence on the MACD histogram is the same in principle as a divergence on the RSI, and these two signals may occur simultaneously. Some traders use the RSI and MACD together, as when they are in agreement this can offer greater confidence about a particular thesis. The histogram flipping from one side to the other is also considered a potential reversal signal. For example, when the histogram flips from positive to negative, that could be interpreted as the market weakening, which may lead to a downtrend. 

Momentum shifts
When the MACD line crosses either the signal or zero line (the neutral midline of the indicator), this indicates a shift in momentum. For example, if the MACD line crosses above the signal line–known as a bullish crossover–this could be construed as a bull signal, suggesting that the current uptrend is gaining strength. When price is ascending, what you often see is a bullish crossover followed by the MACD line crossing the zero line, which further suggests that the trend may be gaining momentum.

Type: Overlay

Sub-type: Lagging indicator

Concerned with: Volatility

• Bollinger bands are made up of upper, middle and lower bands. 
• The middle band is typically a 20-period simple moving average (see below).
• The upper and lower bands are calculated by taking the middle band, then adding or subtracting two standing deviations to each band, respectively.
• The outer bands dynamically expand and contract in response to volatility, and often “squeeze” prior to an explosive move.
• Price reaching the upper and lower bands can be interpreted as “overbought” and “oversold” signals respectively.
• Traders can configure the settings of Bollinger Bands in a variety of ways to suit their preferences.

Reversals
Bollinger Bands can be used for short-term mean-reversion trades - when a market sharply moves in either direction before quickly reverting back. Using the outer bands, traders can look for opportunities where buyers or sellers may be exhausted. It’s possible to set alerts on each of the outer bands as cues to look more closely into what’s going on. In many cases, price will tag the upper and lower bands before returning back to the middle band. By combining Bollinger Bands with the RSI, support and resistance, and price action, traders may be able to identify opportunities where a reversal is likely. One such example is when price forms a double top/bottom at an outer band, tagging the extremity two times in quick succession. 

Riding Trends
As this indicator at its core is a moving average with two volatility bands, it can be used as a means for staying in or adding to a position. If price breaks out to the upside, and repeatedly stays between the middle and upper bands, this can be used as an indication that the trend is still intact. Further, traders can use the middle band to repeatedly add to a position or to manage a trade by dragging a stop behind it. The outer bands can also be used as a way of taking profits, either partially or in full as a trade goes in your favor.

Anticipating Breakouts
Because the outer bands will contract when volatility dries up, they can be used to potentially spot breakouts before they occur. In the bullish case, after the bands become very compressed, traders can set an alert to notify them when price moves above the upper band, indicating that a breakout is in play. This could be combined with volume and traditional chart patterns to offer further confidence. Let’s imagine you spot a symmetrical triangle chart pattern. By waiting for price to close outside of the triangle and the Bollinger Bands, alongside a big spike in volume, traders may have a better strike rate at trading breakouts. 

Type: Overlay

Sub-type: Lagging indicator

Concerned with: Trend

• A Simple Moving Average (SMA) represents the mean average price over a given period. For example, a 50-day SMA sums the closing prices of the prior 50 days, then divides it by 50. 
• MAs are displayed as a continuous line over the top of a price chart, smoothing out the price action and offering directional bias. 
• If the MA is trending up, it generally indicates that price has been trending up over the period examined, and visa versa.
• Exponential Moving Averages give more weight to recent price action, and are therefore more reactive.

Trend confirmation
MAs can be used to determine whether a market has been trending up or down, with a rising moving average indicating an uptrend. However, as MAs are lagging indicators, whether the trend continues or not is uncertain. 

Crossovers
Traders often plot one or more MA onto the same chart. This can be useful, as when the MAs cross each other up or down, it can be used as a signal. For example, when the 50-day MA crosses the 200-day MA, this is known as a Golden Cross. When a short-term MA crosses a longer-term MA like this, it can indicate that the prevailing bullish trend is likely to continue.

Support and resistance
In the same way that some traders use actual price levels as potential pivot points, the MAs themselves can be used in the same way. For example, by combining the MAs with confluence–other meaningful technical data points –traders may opt to enter directly where the MAs are printed on the chart.

Type: Oscillator

Sub-type: Leading indicator

Concerned with: Momentum

• The Accelerator Oscillator (AO) aims to identify when trends are accelerating or decelerating. 
• It incorporates the Awesome Oscillator - a separate indicator which measures the strength of a trend - with a Simple Moving Average to calculate shifts in momentum. 
• The indicator displays as a histogram with red and green bars, which tick up and down with price action.
• Green bars suggest that momentum is growing with the trend. 
• Red bars suggest that momentum is waning, relative to the trend. 
• If the bars are above the zero line, this suggests that the market has bullish momentum, with the opposite being true of bearish momentum. 

Buy and sell signals
By tracking when the histogram ticks above the zero line and the nature of bars that it prints, traders may be able to highlight opportunities to get long or short. Consecutive green bars above the zero line indicate that:

• Upward momentum is increasing.
• A bullish move may be imminent. 

The inverse is true when consecutive red bars appear as the indicator ticks just under the zero line, suggesting a bearish shift in momentum. The higher the bars are above or below the zero line, the greater implied acceleration of the prevailing trend. 

Reversals
There are a couple of ways that the AO can be used to spot potential reversals. The first relates to the zero line. In the bearish case, when the histogram bars tick below the zero line, this signal can be used to simply look for evidence of reversals on the chart. This may come in the form of price action, such as a sweep of a major swing high or multiple rejections at a resistance level. 

The second relates to divergences. As with the RSI, by examining what price action is doing alongside the AO, traders can get a sense of whether a reversal is likely to occur. 

When a market is bullish, if a higher high in price is not matched with corresponding strength on the histogram, this may suggest that momentum is slowing down, and the market is about to reverse. 

Breakout Confirmation
As with increasing volume after a breakout, consecutive green bars that increase in size or push up through the AO zero line can be used as a sign that momentum is accelerating. 

This is particularly important for breakouts, as many do not gain sufficient buying power to sustain bullish price action, meaning that traders have to be on the lookout for confirmation or signs of failure. 

Combining the AO with other lagging indicators may offer a more complete picture as to the strength of a breakout, or whether an established trend is gaining momentum.

Type: Oscillator

Sub-type: Leading indicator

Concerned with: Momentum

• Measures current price relative to a range over a given period, typically 14 days.
• Composed of a %K line and a %D line, which can be used to generate signals after crossovers.
• Looks at whether an uptrend is generating a new high or a whether a downtrend is generating new lows.
• Often used as an overbought or oversold indicator, with above 80 being considered overbought and below 20 oversold.

Buying dips and selling rips
When a market is uptrending, the Stochastic can be used to find value entries when the market pulls back. When the Stochastic is oversold during an uptrend, traders can use this as an opportunity to try to buy the dip, and visa versa for downtrends. 

Reversals
If the %K line crosses below the %D line in the overbought region of the indicator (above 80), it can suggest that the prevailing uptrend is weakening, and that a reversal may be coming. A divergence between price and the Stochastic can also indicate a potential reversal.

NB: The indicator profiles discussed in this article are not exhaustive. There are many more indicators that traders use which you can explore. Based on a search of the most popular indicators, the following list featured consistently:

• ADX.
• Aroon.
• Fibonacci retracements.
• Bollinger bands.
• Average true range.
• Awesome oscillator.
• Ichimoku cloud.
• Parabolic SAR.
• Commodity Channel Index.

1. As confluence: Discretionary traders often use one or more indicators with other factors to strengthen their overall thesis. For example, a trader may first identify an area of support on a chart where they will look for a trade. When price reaches this area of interest, they then look for bullish RSI divergences, which indicate a reversal. If the asset happens to also be trading significantly below the VWAP, this adds more weight to the bullish signal. The more points of confluence a trader can identify in support of their idea, the better. When indicators simultaneously align in support of a directional bias, traders may be able to increase their strike rate. 
2. As signals for mechanical systems: While using indicators in isolation can be problematic, indicators can be used to mechanically generate signals either for human traders or algorithms. As with discretionary trading, the key to success in this field is extensive back testing and forward testing, to ensure that the system is successful over an extended period. Traders are not limited to the standard range of indicators offered by most platforms; many traders create their own indicators to test ideas or suit their needs.

The following combinations are just a couple of ways in which you can effectively use multiple indicators with price action to generate trading strategies, but the possibilities are endless. 

By combining price action with data from the RSI and MACD, traders may be able to better identify when a market is about to reverse. 

For example, if you witness a rejection candle such as a pin bar at resistance, while also recording bearish divergences on either the RSI or MACD histogram, these factors combined provide good evidence for a reversal.

By combining data from lagging and leading indicators into one thesis, you may be able to pre-empt a move in the market then use another indicator as confirmation. 

Let’s imagine you are expecting a breakout on Solana (SOL). You have a trendline drawn on a chart, but before price actually breaks down, your trend line on the OBV breaks first, indicating that sell volume is increasing. 

You use this as a signal to get short, before the Solana price does indeed break down. This is followed by a MA cross, which lags behind the break down but offers additional confirmation that price is likely to continue to move lower.

1. Oversold” or “overbought” does not mean you must buy/sell. Many cryptocurrencies have come and gone since Bitcoin (BTC) first launched in 2009. Virtually all coins that are now a distant memory likely became incredibly oversold at one stage, before eventually trading down to zero. Just because an indicator is telling you that a crypto asset is in the oversold/overbought region, that is not necessarily a signal to act.
2. Indicators will often generate false signals. Before incorporating any signal into your trading strategy, it is crucial to backtest and analyze when these signals are reliable and when they might be misleading. Trading every signal, without accounting for other critical factors such as price action and market context, can be extremely risky. Experienced traders often view indicators as just one small piece of a much larger puzzle, with price action serving as the primary guiding force.
3. Too many indicators can induce ‘analysis paralysis’. Many indicators overlap in terms of the insight they offer. Some can be combined effectively to add weight to a thesis, but too many indicators can be overwhelming. Every trader has to find the right balance of indicators that add value to their analysis, without compromising clarity.

1. The following points summarize key takeaways from several peer-reviewed published articles that have examined the efficacy of technical indicators in cryptocurrency markets:

2. One study examined the predictive power of 124 indicators (including some of those cited above), concluding that their model did have “...predictive power for narrow ranges of bitcoin daily returns”. Further, the study provided “...evidence suggesting that technical analysis is useful in a market like bitcoin whose value is mainly driven by non-fundamental factors.”
3. Another study tested the profitability of a variable moving average strategy on Bitcoin, finding “strong support” for this approach.
4. Finally, using a machine learning model and data from the RSI and MACD to study Bitcoin, researchers were able to generate signals with more than 86% accuracy.
5. In summary, technical indicators use mathematics in different ways to provide visual insights into the behavior of a digital asset, and can help technical traders decide when to enter or exit the crypto market. While these indicators can produce numerous false signals, research suggests that, when used effectively, they have the potential to outperform a buy-and-hold strategy in Bitcoin.

Now that you understand what crypto indicators are and how they can enhance your trading decisions, why not sign up for a free Kraken Pro account and start integrating technical indicators into your trading strategy today?

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