Technical indicators for bitcoin CFD trading

March 25, 2020   Bitcoin

It is pretty difficult to conduct a technical analysis for trading any financial asset, either traditional or virtual, without using at least one technical indicator. Although dozens of indicators and trading signals are at investors’ hand, including more than sixty new indicators in the MT4 Supreme Edition platform, each cryptocurrency trader must determine for himself which indicator best defines his trading style.

In addition, each crypto trader should remember that experts recommend not overflowing the chart with indicators and not relying on more than a couple of most reliable and explicit indicators when making a trading decision, given the fact that some indicators may even conflict with each other, thus giving wrong recommendations. Now let’sl consider some key indicators that cryptocurrency traders and investors prefer.

Moving Average Convergence Indicator (MACD)


MACD is one of the most well-known indicators for trading in OTC financial markets. Moving Average Convergence Indicator is quite popular among Forex traders but it is fully applicable for trading bitcoins and altcoins. It measures the momentum, or impulse, of price movement, but can also help determine the price trend.

You can configure three indicator parameters (26, 12 and 9) according to your trading style. Same as with average values, it is advisable to experiment to achieve optimal indicator timeframes that most closely match your trading strategy.

It offers several types of trader alerts:

  • Passing above / below zero
  • The intersection of the histogram with a moving average

Divergence of the price movement indicator


Calculating the discrepancy between a faster and a slower EMA is the most important indicator concept. This occurs when the MACD indicator does not confirm the price movement.

For instance, the price sets a new maximum in an uptrend, until the indicator reaches a new peak value. This signifies that the upward movement may be depleted and may be reduced.

Meanwhile, when the price strikes a new bottom in a downtrend and MACD doesn’t confirm this, this means the lack of inertia in a downtrend, which can cause an increase in price.

Let’s look at an example of the discrepancy in the graph below - the bottoms are marked with horizontal red lines.

Bollinger Bands Indicator


Each set of the most effective indicators for cryptocurrency trading should include a time-tested volatility channel indicator, such as Bollinger Bands.

Volatility channel is an additional approach to determine the trend. The indicator is based on the concept that if the asset’s price moves away from its moving average by more than a certain level, it can start a new trend.

The Bollinger Bands Indicator was created by financial analyst John Bollinger over thirty years ago. And it still remains one of the most effective indicators available to traders and investors.

The Bollinger Bands indicator uses two parameters:

  • The number of days for the moving average
  • The number of standard deviations you want to associate with the moving average

The most widespread values of standard deviations are 2 or 2.5. The standard deviation measures the divergence from the mean values in one statistical chain. In financial markets and in trading, this tool is used to measure volatility.

Bollinger Bands indicator displays market volatility. The channel expands with increasing volatility and narrows whebn market volatility decreases. A system following a long-term trend can operate two standard deviations and a moving average of 350.

A trader should open a long position if the close of the asset’s previous session is above the top of the channel, and a short position if the close of the previous session is below the bottom of the channel. The entry point of the positions will be if the closing of the previous day returns and intersects again with the average value. You can see the Bollinger Bands indicator on the daily Bitcoin chart:

Pivot points


Pivot points is one of the most effective indicators for determining potential support and resistance levels. Pivot points indicator’s concept is based on standard technical information about price levels, such as upper, lower and closing prices, and the indicator uses this data to determine probable support and resistance levels.

There are various kinds of pivot points, but we will overview the standard calculation method and determine how to find the different types of pivot points and the support and resistance levels related to them. Now let's see how to use this indicator in bitcoin trading.

First, we can use the main pivot point to determine the general trend. If the prevalent market price is above the established pivot point, this implies the dominance of the bullish mood. If the market is below the main pivot, this indicates a bearish mood.

After that, a trader can use the calculated support and resistance levels for more informed trading. Typical rules for trading pivot points recommend to open long trading positions if the indicator displays a bull market, and short positions if the indicator says that the market is bearish. So a trader should close long positions when the market reaches resistance levels and close short trading positions when the market falls to support levels.

Moreover, cryptocurrency traders can apply support and resistance levels as indicators when opening positions. A trader must sell an asset when it reaches resistance level, and it the asset should be bought when the it falls to support line.

In the below chart, you can see what the pivot point indicator looks like:

Cryptocurrency CFD Trading Strategies


Cryptocurrency traders are recommended to apply scalping strategies to use crypto market high volatility to their advantage. The scaling of the BTC/USD pair is performed using an effective strategy with MACD indicator (Moving Average Convergence).

Because of crypto assets’ high volatility and trending, this strategy is appropriate for Bitcoin CFD trading on quite short timeframes, such as a 5-minute chart (M5). The trading strategy includes:

  • 2 Exponential Moving Averages (EMA): 34 and 55
  • 2 stochastic overlays: 8.1.3 and 13.1.3

MACD2Line customized indicator (34.89.34) or default MACD indicator, if you don’t have MACD2Line Pivot, it is available in the free MetaTrader 5 Supreme Edition plugin

If you want, you even can build a Pivot Points calculator in Excel table, but this is quite cumbersome. We also included a complete template with all the indicators that you can upload to your MetaTrader platform.

Here's how to set it up in your schedule:

1. For your chart, M5 BTC / USD;

2. Enter EMA 34 and 35. Blue EMA is 34, and red EMA is 55;

3. Add MACD (34.89.34);

4. Add the stochastic indicator (8,1,3) and (13,1,3) placed in the same window.

5. Finally add the Pivot indicator for the day.

You should buy CFDs on BTC/USD when the blue EMA 34 is above the red EMA 55.

  • Price should return to EMA. Ideally, the price should get support from the EMA or just it.
  • MACD is above 0 (or MACD should show a blue bar if a trader uses the Forex Begins model).
  • Each stochastic must be below 20 and directed upwards (ideally, intersect below 20).
  • The target is the next Pivot with stop loss set below the previous bottom.

Now let’s look at a bitcoin CFD intraday trading strategy which a trader can use if he does not have enough time to scalp. This strategy includes the usage of MACD indicators with RSI and CCI.

To apply this strategy, a trader needs to install MetaTrader 5 Supreme Edition, because the Pivot indicator is required for this strategy. The Pivot indicator offers an unprecedented setting that adapts to both day and long-term traders.

The signals used for this strategy are:

  • RSI (10, closing price)
  • CCI (14, typical HLC / 3 price)
  • MACD (12.26.9)
  • Pivot

The strategy is used for the M30 timeframe. Traders should buy in BTC/USD CFDs if:

  • MACD> O
  • RSI> 50
  • CCI> 0
  • The price is slightly higher than Pivot Point support.

The stop-loss is lower than the entry point, and the goal is the resistance level of Pivot. When trends are strong, this is a successful strategy for CFD bitcoin trading.

Conclusion


It is no accidental that some traders and experts compare bitcoin with gold. The reason for this is the lack of intrinsic value and its price movements are completely predetermined by the supply and demand of the asset. Neither Bitcoin nor gold offer returns in the form of interest or dividends.

While trading a specific asset, you actually do it on a fundamental basis, based on the prospects for increasing its value, based on reasonable logic and financial ratios, in other words, based on fundamental analysis.

But how a fundamental analysis can be conducted for the virtual asset with no intrinsic value? The answer is: It can’t be done. That's why one of the most famous investors of our time, Warren Buffett, does not like neither gold no cryptocurrencies.

However, the situation with cryptocurrencies is even more complicated then with gold. First, cryptocurrencies are not related to any other financial asset. Gold correlates with the movements of the dollar’s price and the mood of stock markets at least.

These are some of the reasons why many analysts recommend short-term bitcoins and other altcoins trading rather than long-term investing. However, technical analysts like cryptocurrencies, Because technical analysis is one of the few types of analysis that can be applied to bitcoin and other virtual currencies. And as we have ascertained, some technical analysis techniques can be successfully applied for trading bitcoins and other altcoins.

Author: Kate Solano for Сrypto-Rating.com
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