Billionaire Warren Buffett once famously said, "In the business world, the view in the rearview mirror is always clearer than the view through the windshield." That means that it is easier to look back and analyze what happened than to look ahead and try to see the future. In the world of cryptocurrency trading, this rule works 100%.
The best Bitcoin indicators also use what is in the “rearview mirror” to predict with varying accuracy what the future holds.
Let's take a look at five of the most popular Bitcoin indicators that can help predict future price changes for the leading crypto.
What are the indicators?
Indicators are technical analysis (TA) tools that help traders predict price and direction of movement with varying degrees of accuracy. TA uses historical price data was a few seconds/days/months/ years ago, turning them into easy-to-read indicators; while indicators are created using mathematical methods.
Data from formulas is turned into graphical images that are superimposed on or next to price charts to help traders make decisions.
Can indicators predict the future with accuracy?
No, indicators cannot predict the future with great accuracy. However, they can help a trader observe trends to gauge their direction and strength. The logic of indicators is similar to Newtonian physics: the price movement has an impulse, and the larger it is, the more difficult it is to stop it (inertia); and vice versa. This concept is reflected in the well-known saying: "The trend is your friend."
Imagine that there are 21 days left before Christmas, and a fashionable toy has appeared in one of the stores, the sales of which reached 20,000 pieces on the same day. On the next day, 25,000 toys were sold in the same store, and on the third - 30,000. If you are the owner of another store, and you also want to buy such toys for sale, then, before Christmas, you still have the opportunity to achieve some desired sales volume. But, if at some point you saw that the sales of your neighbors fell from 30,000 toys to 15,000, or even up to 5,000 per day, then you will think carefully before buying "more" of these toys.
Even if you predict that your store will have very successful sales of such a product before the holiday, you will not be able to exactly repeat the sales volumes of 20,000, 25,000, and 30,000 toys per day in the same way as your neighbors did.
Indicators use formulas and charts to help traders “see” the future possible behavior of buyers, sellers, and prices. However, they are not able to provide you with "prices of the future", calculated with great accuracy for a specific point or period.
- Ichimoku Clouds
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The Ichimoku Clouds indicator is a tool of five lines, each of which displays averages for periods, the total length of which can be determined by the trader. When two lines intersect, the area between them is shaded like a "cloud".
If the price is above the cloud, then the trend is growing, and when the price is below the cloud, then the trend goes down. If the cloud is moving in the direction of the price, then the trend should be considered strong.
- Relative Strength Index - RSI
RSI is one of the simplest indicators that indicate whether an asset is overbought or oversold. The RSI uses historical data to determine the total demand for an asset and then calculates whether people are buying the amount of the asset that could lead to a downward price correction, or the opposite could happen.
The RSI indicator has two lines - one at the 30% level, the other at the 70% level. When the indicator is above 70%, the price is likely to fall; when the value is below 30%, then the price will probably rise.
- Moving average - MA
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When prices fluctuate upward or downward, their movement can be misinterpreted as a reversal or trend continuation. The MA indicator calculates the average price over a while and also recalculates it over time.
Short periods have little effect on the MA indicator, which relies on extended periods. By looking at the MA chart, you can identify support and resistance levels. Support is a lower “barrier” that the price will most likely not jump over. The resistance level is the opposite of the support level - it is also a kind of barrier above the current price level, which is unlikely to be overcome with confidence. Thus, the MA indicator makes it easy to see support and resistance levels.
- Fibonacci levels
Like moving averages, Fibonacci levels are another useful tool for predicting price action. Fibonacci levels do not represent complex and interdependent calculations, but they are still included in the list of indicators for the trader due to their usefulness.
This indicator allows you to operate with standard levels 0; 23.6; 38.1; 50.0; 61.8; 76.4; 100. When a sudden price change occurs, Fibonacci levels allow you to track such movement and draw certain conclusions about price behavior. Many traders believe in Fibonacci levels, which resemble some kind of self-fulfilling prophecy levels.
- Trading volume
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Trading volume is one of the most valuable and undervalued indicators in the bitcoin market. It shows how many people are buying or selling bitcoins.
Before making a decision based on any other indicator, it is recommended to check the trading volume. If there is a significant price movement in a certain direction, then there must be an “impulse” of the movement, which is supported by a sufficient number of people.
The number of traders who are behind the price movement should be counted as “mass”, which should then be multiplied by “speed” to obtain “momentum strength”. However, the fewer traders are involved in a trade at a given moment, the less “momentum”. At the same time, less impulse will mean less "price inertia" - a situation where the price can easily reverse.
Going back to the Christmas toy example, you can imagine that sellers could raise the price from $ 50 to $ 100 at the height of sales. However, if in fact, it turns out that only five people were willing to buy it for $ 100, then the true value of this product should be closer to $ 50.
The mentioned bitcoin indicators can help you in making trading decisions because what is in the "rearview mirror" can sometimes indicate what can be seen through the "windshield".