When it comes to crypto trading, momentum indicators stand out as some of the most important technical analysis tools. Due to the widespread usage and popularity of these indicators, they are also highly sought after in cryptocurrency trading settings.
Whether you want to make a quick buck or need to generate long-term profits, momentum indicators are essential for reaching your goals as a crypto trader. That’s why, it’s critical that you look into the role of these analysis tools to make the most out of your trading efforts.
To see how momentum indicators work and how you can benefit from them, here’s a lowdown on their functionality and overall execution.
What Do Momentum Indicators Show?
Simply put, momentum indicators help you track the overall strength of an asset’s price movement. These indicators show their results by recording the most recent or current price of an asset and comparing it to the price from a previous date.
By studying the frequency at which a crypto asset’s price increases or decreases during a given amount of time, you can analyze the stability of its current value. As a result, you can easily grasp whether an asset’s value is strong enough to hold its position in the future, or fragile to the point where it may drop quite soon. This allows you to make buying and selling decisions in light of transparent data.
This trend is then visually reflected on your trading chart in the form of an indicator. This ensures that you can easily determine the overall strength of an asset’s price trends with a single view on your screen.
As a result, you don’t have to go through detailed date input or manual analysis each time you are doing a check-in on your required cryptocurrency. You can simply look at the momentum indicator line on the chart to tell you about the price trend. This way, you can make informed decisions without investing too much time in manual analytical activities. Due to these qualities, these indications prove critical to the success and execution of your crypto trades.
You Can Choose Between a Variety of Momentum Indicators
As mentioned above, the main goal of momentum indicators is to judge the overall stability of a crypto asset’s price. But they achieve this objective through different ways. This provides you with the flexibility to choose between multiple momentum indicators that are a perfect fit to your trading style and needs.
There are various momentum indicators that can be used with popular trading bots and systems. However, two of the most popular and widely used indicators happen to be the relative strength index (RSI) and moving average convergence divergence (MACD).
How Does RSI Work?
The RSI is based on the foundational concept of momentum indicators. However, it is not a simple indicator for price itself. Instead, it is a trend-following indicator that gives you a quick report of the respective cryptocurrency asset’s trading cycle as well.
The RSI is an oscillator, which means that it works by forming high-bands and low-bands between two extreme results or values. This allows you to determine trends for the asset’s price value.
In trading charts, the RSI can be placed right below your price trend chart to determine overbought or oversold conditions for an asset. This lets you take in the crypto asset’s market strength in terms of buying and selling activity in relation to its price.
But instead of letting you make the calculation through visual data, the RSI makes it easier to determine market conditions. Here’s how it’s done.
When set against a time duration, the indicator oscillates between the range of 0 to 100. Keeping in line with its price activity, the asset is labeled as overbought when the range goes over 70 and considered as oversold when it drops below 30. This lets you make your own trading decisions ahead of time and allows you to anticipate market movements right before they happen.
While 30 and 70 are the default ranges for the RSI oscillator, you can also modify them for trading mechanisms that make you the most comfortable. For instance, if an asset often touches the range of 70 and causes false alarms, you can increase its overbought value to 80 to be notified only when any extraordinary condition raises its head. Similarly, if an asset often dips to 30, you can lower its oversold parameter to 20 to take a decision only when the conditions are extraordinary.
Since cryptocurrency value and market conditions fluctuate rapidly, the RSI is critical to any crypto trader’s technical analysis. The indicator performs best when it is put against a wider date range. However, some traders also set it on ranges as short as hourly durations to judge an asset’s daily activity.
In either case, the RSI delivers timely statistics without any complications. This is the primary reason why it has become the go-to indicator for many new and seasoned crypto traders. Depending upon your level of comfort with trading, you can start using the RSI in its advanced or basic form.
How Does MACD Work?
The MACD is a momentum indicator that works on a trend-following basis. But as compared to the RSI that takes a simpler approach, the MACD goes after a more expansive analysis.
For starters, the MACD is not an oscillator and doesn’t create bands between two extreme values. Instead, it presents its technical analysis by studying the most recent moving average (MA) of a given asset. To be specific, the indicator takes in the Exponential Moving Average (EMA) of your target asset in order to show you the strength of its price movements or trends.
The MACD works by subtracting the 26-period EMA from the 12-period EMA. This creates an MACD line that is put on your chart, which is put together with a 9-day EMA line that is more popularly known as the signal line. By using the MACD line and the signal line, you can determine the stability of a market’s trend.
The backend execution of this indicator sounds complex, but using MACD during your trading remains quite simple. When the MACD line goes above the signal line, the momentum points towards a bullish market that may likely see more upwards movements in the asset’s value. On the other hand, if the MACD line dips below the signal line, it indicates a bearish market that may notice overtime decrease in value.
But the MACD doesn’t stop at bearish and bullish signals. If the MACD trend shows significant fluctuations overtime, it is a clear indication that the asset’s value isn’t viable in the long run. But if it only shows slight variance, then it indicates that you can trust the asset’s current value to hold its own. Due to its balance between intricate calculations and simple execution, the MACD is considered one of the top indicators for determining the momentum of an asset.
In crypto trading, an asset’s value can dance between extreme ranges even during a recent period of time. This makes it critical for you to know about these movements before you invest in an asset or trade it on an ongoing basis.
Due to its overall functionality, MACD is used by new and old traders alike in cryptocurrency trading settings. Whether you want to indulge in overtime investments or day trading, using MACD is a highly recommended strategy that pays off in the long run.
You Can Use Different Momentum Indicators Simultaneously
By now, you may have established how important momentum oscillators and indicators are to your trading toolkit. But in order to make the most out of your efforts, it’s critical for you to understand that you don’t have to settle on a single momentum indicator for your technical analysis. Instead, you can use multiple momentum indicators at once to get a clearer and timely picture of the market.
This phenomenon can be seen among indicators offered by various programs and trading bots. But it is most accurate to the RSI and MACD indicator, both of which are incredibly popular among traders of all types.
Why You Should Use the RSI and MACD Indicator Together
Both the RSI and the MACD are momentum indicators that are based upon the trend-following mechanism. However, they perform different functions from each other. For starters, RSI is an oscillator, while MACD is not. But that’s only the surface level difference between them. The actual functionality and method of analysis are the factors that set these indicators apart.
While the RSI looks at closing price changes and corresponding trend movements, the MACD takes in multiple EMAs for asset price and its effects on future value. As a result, both of these tools execute distinct forms of analysis even while belonging to the same group of momentum indicators. This also creates a difference in the results that they display against the same asset.
For instance, while the RSI may show that an asset’s market is already in the oversold condition due to recent price changes, the MACD indicator may show that the trend still has some distance to cover in regard to recent moving averages. Either result on its own would be correct in this situation. But in order to get a more detailed analysis, traders would have to consult the other indicator to make more informed and confident decisions.
That is why, it is common in traditional as well as crypto trading to combine both momentum indicators for a holistic grasp on market conditions. This ensures that you are able to get a more comprehensive picture out of your technical analysis without having to go through an abundance of manual efforts.
Why Use a Momentum Indicator in the First Place?
Many new traders find it daunting to familiarize themselves with new systems such as trading charts, oscillators, and indicators. The momentum indicator isn’t any different. However, it’s crucial to remember that without the use of accurate trading signals, you are essentially taking shots in the dark without any reliable information on hand. This increases your chances of frequent losses by a large margin.
Technical analysis tools such as momentum indicators not only provide you with accurate statistics from the market in a timely manner, but also do so in an easy to understand approach. While it might take some time for you to acclimate yourself with these indicators and their overall visualization, it is well worth the additional duration due to the results that they deliver at the end.
But it’s not only the accuracy of market results or analysis that matters here. The way that this benefit is delivered also plays a major role. As mentioned above, using these tools lets you get a quick yet reliable picture of the market through visual indicators. This ensures that you just need to throw a glance to your screen in order to know if you need to take any drastic steps with your trading.
This time-saving mechanism goes a long way in both day trading and swing trading. Making use of these signals also helps in position trading, where larger trades could influence your funds and savings to a significant extent.
That’s why, it’s critical that you look into momentum trading indicators in order to enhance and improve your trading abilities. Since these indicators are widely available through popular trading charts and easily integrated into various trading bots, accessing them is as easy as it gets. With the ability to utilize them in user-friendly interfaces, it doesn’t take long for you to go a long way around their learning curve.
Overall, if you want to amplify the efficacy and efficiency of your trading strategies, it’s essential that you look into momentum indicators. By using popular indicators such as the RSI and MACD, you can easily improve your analysis and get the most benefits out of each cryptocurrency trade that you make.
As always, note that it is not easy to trade in any market and that you must ensure to practice patience, caution, and have a long-term view on the overall situation.
These tools and methods help to refine your strategies and make better decisions but it is still necessary to practice proper risk management while risking money that you can afford to lose.