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Cryptocurrencies (or crypto) has been thrown in the limelight recently with Bitcoin’s meteoric rally this year, the cryptocurrency having risen for the fifth month straight since February 2019. Bitcoin most recently hit a high of US$13,775, before its price corrected to US$10,085 (as of 31 July 2019). Bitcoin’s rally in June was no doubt spurred on the market’s positive reception of the announcement of Libra coin, Facebook’s proposed cryptocurrency to facilitate virtual payments across its ecosystem of 2.4 billion users.
Given what we have seen of the crypto market in general, there can certainly be meaningful trading opportunities given proper research, understanding, and action. However, how would you know when to enter the cryptocurrency market? Should you take a position on a particular cryptocurrency now, or hold off? This is where technical analysis may assist traders with assessing, analysing and answering these common questions.
In this blog post, we are going to run through three commonly used technical indicators that are applied in trading cryptocurrencies: Moving Averages, Fibonacci Retracement and Relative Strength Index. We will also illustrate the application of these technical indicators using various cryptocurrency pairs.
The market indicators presented in the article:
1⃣ – Moving Averages
The moving average of an asset can be seen as a trend following indicator which tells you about the price level of an asset based on its previous prices. The moving average is calculated over a certain number of fixed time intervals, and common time periods used are the 50 day and 200 day moving averages.
2⃣ – Fibonacci Retracement
Fibonacci Retracements are horizontal lines that divide the distance between two extreme points on the price chart according to the Fibonacci ratios: 23.6%, 38.2%, 50%, 61.8%, and 100%.
Fibonacci Retracement lines are drawn by:
- Identifying the highest and lowest price in the time frame that you are interested to analyze and drawing horizontal lines at each of these price levels
- Divide the distance between those lines by the Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, and 100%) and draw a horizontal line at each level.
3⃣ – RSI
The Relative Strength Indicator (“RSI”) is used as a momentum indicator which measures the magnitude of recent price changes. The RSI is determined with a 2-step calculation: