The Smart Way to Combine Indicators for Crypto Trading
Combining technical indicators in a meaningful way can help cryptocurrency traders be more accurate in trading. However, with so many technical indicators at your disposal, it can be intimidating and challenging to use them properly.
Types of Technical Indicators
In technical analysis, technical indicators can be grouped into four main categories:
Trend following indicators like moving averages, Parabolic SAR, MESA, etc.
Momentum indicators like the Relative Strength Index (RSI), Stochastic, etc.
Volume indicators like On Balance Volume (OBV), Money Flow Index (MFI), etc.
Volatility indicators like Bollinger Bands and Average True Range (ATR).
A helpful rule of thumb is only to combine technical indicators that provide us with different signals about the market. But unfortunately, even season traders make a common mistake in using indicators that broadly speak to provide us with the same signals.
For example, the RSI and stochastic indicators are both momentum indicators that provide the same type of information about the market. However, if we compare the two indicators, we notice that they tend to rise and fall in tandem.
Combining the two indicators can be counterproductive as it can mislead traders into believing they have a confluence of signals. This is simply the same signal, but viewed from another angle.
How to Combine Technical Indicators
The smart way to combine indicators to analyze cryptocurrencies is to use indicators that belong to different categories. For example, you can connect a trend following indicators like a moving average and a momentum indicator like the RSI indicator.
This combination is very powerful because the moving average shows the direction of the trend, while the RSI displays how strong the trend is. So, for example, if the price is above the moving average and the RSI is also above the 50 mid-level, we have a much more reliable signal that shows that we’re in an uptrend and behind the trend, we have strong bullish momentum.
Combining Indicators on Cryptohopper
Other indicators that work well together on Cryptohopper especially are the MESA and the Moving Average Convergence Divergence (MACD).
The MESA is an adaptive moving average and is a sticking indicator on Cryptohopper. Meaning that as long as the MESA shows bullish momentum, it will send continue to send “BUY” signals. Conversely when the MESA shows bearish momentum, it will send continue to send “SELL” signals.
The MACD on the other hand sends a single buy or sell signal. There in this case the MESA can act as a filter, just as in our example with the moving average above. The MACD will thus serve as the entry and exit of the strategy.
The Parabolic SAR is another indicator that works in the same way as the MESA through sticking signals.
However, all other moving averages are not made of sticking signals on Cryptohopper. Meaning that they will only send 1 buy/sell signal. Therefore they are not suitable to use as filters like the Parabolic SAR or MESA.