16 min readTechnical analysis, on its base level, refers to reading of the market charts for an asset. In the case of Bitcoin, its vast volatility means that there is a lot that can be read in the technical analysis, but it also means there is a need for understanding the different indicators.
In this article, we will approach 10 of the top technical indicators that can help you as a trader to make money off trading Bitcoin by shorting it. We will also look at which indicators are the best for different types of trading, such as day trading, or swing trading.
Top 10 Technical Indicators
Technical analysis, as mentioned above, involves the reading of the price chart of a certain asset — in this case Bitcoin. The way in which the price moves can be charted and understood and used to predict future trends if the right indicators are used and understood.
There are 10 indicators we will be looking at: Bollinger Bands; Williams Alligator Indicator; MACD; Relative Strength Index; Ichimoku Kinko Hyo;Stochastic Oscillator; Moving Average EMA; On-Balance Volume OBV; Parabolic Stop and Reverse SAR; Average Directional Index ADX.
All of these indicators have their place and can help in identifying what the price of an asset will do. For example, Moving Average (MA) is an indicator used to identify the direction of a current price trend, without the interference of shorter-term price spikes; A stochastic oscillator is an indicator that compares a specific closing price of an asset to a range of its prices over time; MACD is an indicator that detects changes in momentum by comparing two moving averages; and a Bollinger band is an indicator that provides a range within which the price of an asset typically trades.
From these brief explanations you can see why it is important to understand these indicators, and why analysing them can help point out patterns and movements in the prices that may show potential price moves.
TA Indicator 1: Bollinger Bands
The Bollinger bands offer a trader insight into the usual trading range of an asset. So, over a set period of time, the band can show a narrow trading zone, or a wider trading zone, which paints a picture of volatility in that time zone. By looking at Bollinger bands, a trader can determine just how much volatility is present, and if more is one the way.
Volatility represents a chance for shorting if it is in a downward trend whereas narrow bands might indicate it is not worth shorting Bitcoin as the volatility won’t take it low enough to be led to profit at a short sell.
Bollinger bands are also great for finding out when Bitcoin is trading outside of its usual levels, and are used mostly as a method to predict long-term price movements. When a price keeps moving outside the top limit of the band, it could be overbought, and when it moves below the lower band, it could be oversold.
Indicator 2: Williams Alligator Indicator
The Williams Alligator Indicator is what is known as a trend indicator which attempts to outline key times when a trend may be forming. This is obviously helpful for shorting Bitocin as it could show that Bitcoin is about to trend downward and prime for short selling.
To understand this indicator, one has to think of an alligator. The Alligator indicator consists of three moving averages, each smoothed over different time-frames, which he called ‘balance lines’. These balance lines are designated as the jaw, the teeth, and the lips of the alligator.
There is the Alligator’s jaw, the slowest moving average of the three that is a 13-period moving average, shifted forward by 8 bars. The Alligator’s teeth is the intermediate moving average of the three, smoothed over 8 periods, and shifted 5 bars forward, then the alligator’s lips are calculated as a 5-period moving average that is then shifted 3 bars forward.
In the graph below, the jaw is blue, the teeth are red and the lips are the green line.
TA Indicator 3: MACD
MACD, or Moving average convergence divergence, is used to find changes in momentum in the price of Bitcoin and this is done when two moving averages are compared. It is mostly used to show traders where there are good buy and sell opportunities in and around the support and resistance levels in the price.
In MACD, it is about looking for convergence — where the moving averages are coming together, or divergence, where they are moving apart. If moving averages are converging, it means momentum is decreasing, whereas if the moving averages are diverging, momentum is increasing.
By identifying the increase or decrease in momentum of the price, in either direction, short sellers can determine if there is going to be a faster or slower movement down, or a reversal of fortunes.
TA Indicator 4: Relative Strength index
Relative Strength Index, or RSI, also helps traders track momentum and is quite popular and useful in Bitcoin as it also identifies market conditions and warning signals for big and potentially dangerous price movements.
This indicator can range between 0 and 100 and the higher its level usually means the higher chance of the asset being overbought. So, if Bitcoin’s RSI is at around 75, it is overbought, while if it is at around 30, it is oversold.
When an asset is overbought it suggests that short-term gains may be reaching a point of maturity and assets are primed for a price correction. On the other hand, an oversold asset could mean that short-term declines are reaching maturity and assets may be in for a rally.
Thus, for a short seller, a high RSI on Bitcoin would mean that it is a good time to short sell and that the price of the coin is going to dip to a level that would make it profitable to short sell.
TA Indicator 5: Ichimoku Kinko Hyo
The Ichimoku indicator is used to gauge momentum along with future areas of support and resistance. The all-in-one technical indicator consists of five lines called the tenkan-sen, kijun-sen, senkou span A, senkou span B and chikou span.
It is an indicator that is intended to paint a whole picture on support and resistance of an asset with ‘one look’ as, n Japanese, “ichimoku” translates to “one look,” meaning traders only have to take one look at the chart to determine momentum, support, and resistance.
It looks to be quite a complicated indicator, but once a trader masters the five different lines, it can easily show a quick overview of where the asset’s resistance and support are allowing short sellers to see where a floor is, and where a ceiling is, which can lead to a drop in a correction.
In the graph below, the shaded green area is the Ichimoku cloud which represents a key area of support and resistance.
TA Indicator 6: Stochastic Oscillator
The stochastic oscillator is an indicator that is also useful for showing momentum and trend strength, it does this by comparing a specific closing price of an asset to a range of its prices over time.
On a scale of 0-100, the Stochastic Oscillator can show an oversold market with a low reading of around 25, but if the market is overbought, the indicator will be closer to 80. However, if a strong trend is present, a correction or rally will not necessarily happen as a result.
TA Indicator 7: Exponential Moving Average (EMA)
The EMA is another very popular indicator used in Bitcoin price predicting because, when used with other indicators, EMAs can help traders affirm major market moves and outline if they are legitimate, or not.
For longer term Bitcoin price prediction, the 50 day, and 200 day EMAs are often used. These EMAs can also be used on the 12 and 26 day marks where it places a greater weight on recent data points, making data more responsive to new information.
These indicators are great as they point out big price moves, but they are only useful when applied correctly and well understood. If not well understood they can lead incredibly incorrect readings.
TA Indicator 8: On-Balance Volume (OBV)
The OBV indicator is a cumulative indicator, meaning that on days when the price increases, volume is added to the cumulative OBV total. If the price decreases, that day’s volume is subtracted from the OBV total.
By doing this, the OBV helps show momentum one again and is getting more and more popular with cryptocurrencies because of the higher levels of volatility. Following these trends through cumulation of good days and bad days paints a picture of a generalised trend, and for short Bitcoin sellers, they can see when the trend has peaked and when it is just taking off.
TA Indicator 9: Parabolic Stop and Reverse (SAR)
The SAR indicator is antherone that looks to help show traders the way in which the asset they are following is moving. It is useful for mapping trends, but also allows for a user to spot price reversals and entry and exit points. It uses a trailing stop and reverse method called “SAR,” or stop and reverse, to identify suitable exit and entry points.
The way this indicator is shown is through a series of dots around the asset price which points out if it is moving up, or down. Essentially, when the price of the asset starts rising so the dots will also go up, and their momentum in doing this is also worth noting — they will move faster as the trend develops.
TA Indicator 10: Average Directional Index (ADX)
While many of these indicators are used to show trend direction ,the ADX helps determine trend strength. For many, this is a very powerful indicator because trends can be spotted, but they may be weak trends that do not have enough impact to helpo trading one way or another.
ADX calculations are based on a moving average of price range expansion over a given period of time and it is plotted as a single line with values ranging from a low of zero to a high of 100. With values that are lower, from 0-25, the trend will not be seen as very strong, but when it starts rising above 50, there is evidence of a very strong trend.
Best Indicators For Day Trading
It is now quite clear that there are a number of different technical indicators that can become very powerful tools for Bitcoin traders, especially those looking to short the market. However, the different indicators, and the different data they provide can be more efficient for certain types of trading too.
It is important to look at different indicators based on what type of trading you will be doing. Because cryptocurrency is so volatile, it can move a lot in a single day. This is what makes day trading so popular for crypto traders, and why it is one form of trading that aligns itself well to certain indicators.
One of the most potent weapons for a Bitcoin day trader is moving averages. The reason for this is that there are DMAs, or Daily Moving Averages, which help traders keep on top of trends as they change on the daily.
Although Moving Averages are more efficient over longer periods, a DMA will allow the trader to connect the average closing rates over a day and understand if there is any underlying trend building up.
Bollinger Bands are also very useful for day traders, and are the next step up from DMAs. This indicator over a day can show the trader if the asset, in this case Bitcoin, is showing higher volatility in that day by breaking out of the band and moving beyond the standard deviation.
A volatile day for a trader can also show trends, but it can also indicate that there is a chance for profit both ways with longs or shorts in a single day of trading.
Momentum Oscillators are also great for day traders as these allow traders to pick up on volatility that is uncorrelated to longer term bullish and bearish runs. Short period cycles can be spotted with momentum oscillators, especially when the price is pushing for new daily highs as it can indicate if there is more to come, or if a correction is expected.
Best Indicators For Swing Trading
Swing trading is another form of trading that is rather fast-paced, and thus ideally suited to Bitcoin. It is not as rapid as day trading, but still allows for quick turnaround, but with a little more time to formulate plans and look into indicators.
For Swing Trading, where you are holding the asset until the price swings, the RSI is a very useful indicator. This indicator shows when there are good entry and exit points in the market, which is the basis of swing trading. RSI shows when the market is overbought, or underbought, and thus determines where it will go next and if it is a good idea to buy in, or sell out.
An often overlooked indicator which is quite easy to consider is volume. Volume is important in cryptocurrency as it is nascent and still experiencing adoption, so, when the market sees a flood of volume, it is usually indicative of a trend that shows a swing is coming.
In Bitcoin trading, high volume when the price is lower than expected usually indicates a rise is coming as interest is piquing, while high volume when the price is high means that there could be a sell off brewing.
Combining Trading Indicators
Having read through the top 10 indicators provided above, you will see that there is some overlap in what they do — especially in tracking trends etc. — but each has its own special way of doing things that can be further heightened by combining with similar, or complimentary indicators.
There are even well established combinations for cryptocurrency trading especially which paint a much clearer picture for the trader. For example, MACD is often combined with RSI and the Stochastic indicator.
The Stochastic indicator is there to measure when Bitcoin is oversold and MACD is a trend following indicator that shows the relationship between different EMAs from where the MACD and the signal line are obtained.
The Stochastic ranges from 0 to 100 to show oversold at around 20 ,and overbought at 80. On the other hand, MACD gives buy and sell signals through its signal and MACD lines crossovers. So, a buy signal takes place when the MACD line rises above the signal line and a sell signal occurs when the MACD line goes below the signal line.
To combine these two, if both are indicating the same signal — be it a buy or sell — you can choose to open a position, be it long or short, with much more confidence.
Top Tip
While it may seem daunting entering into a space that delves deep into charts and technical analysis, it is one that can be very rewarding for traders and help make Bitcoin trading a lot more profitable.
The Top Tip is to learn, try, and practice. Reading technical analysis and indicators is a little like learning a new language, it requires practice. The more you do it, the better you will get, and the more you will get out of it — especially when you start combining indicators for your trading.
Conclusion
The shorting of Bitcoin is a bit like the holy grail of hedging an asset that is known for its volatility. Anyone can make money when Bitcoin is rising, but you need to be smart to make money off Bitcoin when it is falling.
To short Bitcoin, you also need to know what to expect in the future, so you know when to open this position. The only window you will get into the future of Bitcoin’s price will come from different technical indicators. Understanding technical indicators, reading them well, and implementing them will allow you to become far better at predicting when Bitocin will drop, and when you should open a short position.
The best way to get started with this is to just get started. PrimeXBT is one site that offers Bitcoin trading and other assets, where you can open short positions and implement technical analysis with its built in charting tools.
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