5 Types Of Trading Graphs And How To Use Them
Trading cryptocurrency is exciting. The volatility of the markets means that there is a lot of movement, with a lot of statistical models claiming that they have the secret to easy success. The truth, though, is that, like all things, cryptocurrency trading requires effort if you’re seeking to really understand it. However, there are a number of statistical identifiers that can assist you in spotting market trends and knowing when to buy or sell. Here, we look at five of the most popular in a bit more detail11)
1. Bollinger Bands
Bollinger Bands were developed by an individual named John Bollinger in the 1980s, in order to assist stock traders in their day to day analysis. Bollinger Bands are curved bands, drawn around the price structure of an asset. The three bands are each designed to show a different facet, with the middle band designed to cover the shifting average and the upper and lower bands used to determine whether the price of the asset is high or low.
In essence, therefore, the three Bollinger Bands are designed to show you whether the asset you’re analysing (or the market in which the asset functions) is volatile or stable at a given time. The bigger the gaps between the bands, the more volatile the market. Another positive of Bollinger Bands is that they are dynamic resistance indicators, changing depending on the market’s behaviour.
Practically speaking, Bollinger bands can be a good indication of when and how to make profitable trades, safely. In the screenshot provided, you can see the squeezing of the Bollinger Bands on April 24th and April 30th, indicating the likelihood of a breakout – a good time to buy as the prices were likely to increase – which they did! The “Bollinger squeeze” is a good opportunity to enter a long position, as the price of the crypto still has to be tested against the resistance represented by the upper band. Bollinger bands are effective on any time frame, but John Bollinger uses them on a one day timeframe. Remember, Bollinger Bands, like most indicators, shouldn’t be used or relied on alone – use them in conjunction with other identifiers.
2. A Simple Moving Average
The Simple Moving Average (SMA) is probably the most common indicator used today. As such, it is critical to your arsenal as a budding crypto-currency trader. Supremely useful, it is also easy to understand.
An SMA is based on specific time periods and acts as a momentum indicator. It is calculated by taking the price at a certain number of periods, adding them together and then dividing by the number of periods. In essence, therefore, you are working out the total. However, the real relevance of the SMA comes from the length of the period. This period length is reflected in the name. Thus, an SMI 14 reflects 14 periods. An SMA 40 reflects 40 periods.
Using the SMA is just as simple. Usually, analysts will calculate an SMA over a longer period – an SMA 50, for example. If a smaller SMA – an SMA 12 – is below the longer SMI and then crosses it, this may be an indication that the cryptocurrency market in question is due an uptick. This is often times a good time to buy!
3. The MACD Indicator
MACD is short for Moving Average Convergence/Divergence Oscillator. It functions as an indicator for trends in a given market. Particularly, it serves as an indicator if market trends are downward or upward. It is represented by two lines on a bar graph. The two lines are the MACD line and the signal line, whilst the bars represent divergence. The MACD line is set between 9, 12 and 26 points and measures the differences between the Exponential Moving Average over that period. The signal line represents an average of the MACD over a certain period and makes it easier to assess the trends in your data. Finally, the bar chart shows you the difference between your MACD line and your signal line.
All well and good – but how does this info help you make better trades? If the MACD line cuts the signal line and is going up, whilst the divergence is positive – it’s usually an indicator that you’ve found a good time to buy. If the opposite is true, it’s a good time to sell. The MACD is a good indicator that a trend is about to end – whenever the MACD diverges from the price line, a market trend is likely to end.
The RSI is the relative strength indicator. It is an extremely common indicator in cryptocurrency trading. It is extremely useful in assessing when a particular coin is being bought or sold too aggressively, at unsustainable numbers.
It is measured using the following equation: RSI = 100 – 100/(1 + (avg gain of up swings over period / average loss of down spikes over period). This calculation is going to give you a value ranging from 1 to 100. The rule of thumb is that if your RSI is 30 or less, your cryptocurrency is being oversold. If, however, the number is greater than 70, it is being bought too aggressively. What this means is that, in the medium term, the price is likely at a peak. Which would then indicate a good time to sell.
Whilst the RSI can be measured over any time frame, the most popular RSIs are RSI 14 (the RSI over 14 days) and RSI 21 (the RSI over 21 days). The longer the time period used for the RSI, the less reactive it is to the market forces at work. Thus, length of time your RSI is measured over will depend entirely on your purposes and the type of trader you are.
Stochastics are measured according to an identifier known as a stochastic oscillator. This identifier takes the present price of a particular asset or cryptocurrency and compares it to the price of that asset at selected high price points over a selected period. The theory being that prices will close near their high point in a market that is trending upward whilst the opposite is true in a market that is downward trending. A stochastic oscillator below 20 shows a market that is selling too aggressively whilst an oscillator that is greater than 80 shows a market that is buying too aggressively. As with most of these identifiers, market sensitivity is decreased the longer the time period being assessed is.
The calculation used for your stochastic oscillator is as follows: the most recent close price, minus the lowest price over the relevant period, divided by the highest price over the period less the low of the period. Your answer, multiplied by 100, gives you your figure.