Trading indicators: Can EMA, Average True Range and Williams Fractal make crypto price predictions?
What can indicators do for crypto traders?
- Exponential Moving Average
- Average True Range (ATR)
- Williams Fractal
- Awesome Oscillator (AO)
- Standard Deviation
- Stochastic RSI
- Chaikin Money Flow (CMF)
- Ichimoku Cloud
- On-balance Volume (OBV)
- Fibonacci Retracement
- Final point
People who trade in stocks and shares often use trading indicators as a basis for decision-making – and the same principle applies to cryptocurrency, too. Let’s take a look at some of the more important indicators and find out what it is that they do.
Exponential Moving Average
What makes the Exponential Moving Average (EMA) a little different to other trading indicators is that it gives more attention to recent developments than things that might have happened a fair bit earlier. There is a logic to this. For instance, if something was worth considerably more than it was a year ago, but has declined strongly over the last six months, then giving more weight to what happened recently might be a bit more honest.
You can put in a longer-term and a shorter-term EMA on your price chart and, when the short-term line goes above the long-term one, that serves as an indicator to buy and when it is reversed, that means it is an indicator to sell. One word of warning, though – because the EMA responds quickly to recent events, you may see some incorrect signals coming through.
Average True Range (ATR)
The Average True Range (ATR) indicator, which was created in 1978, centres around three things. These are the differences between the current high and the previous close, the current low and the previous close and the current high and the current low. It is used to measure the price volatility so, in and of itself, it might not be the best idea to help make predictions for either the near future or the long term. If the indicator line goes up, then the market is more volatile but, as it goes down, it is less so.
The ATR indicator can be used to find good entry and exit points into a market for traders. Someone using it can find a potential break out point for a commodity and then make a decision, based on other factors, as to whether to buy or sell.
The Williams Fractal trading indicator is named after its founder, Bill Williams, and utilises chaos theory. In order to read it, you will need to look at five successive price bars where the third (or the middle) bar represents the highest high or the lowest low. The indicator will put an arrow above the middle bar.
One thing to point out is that, slightly counterintuitively, one where the high is in the middle indicates bearishness while one where the low is in the middle suggests a bullish market. Traders use this indicator to identify trading opportunities. That said, there are some issues with the Williams Fractal trading indicator, most notably that, because it needs five bars to exist, the market might be moving in a different direction to what it suggests by the time it reveals itself.
Awesome Oscillator (AO)
The Awesome Oscillator (AO) was also founded by Bill Williams, and it is used to suggest whether a market is, ultimately, more bullish or more bearish. It is calculated by working out the difference between the newest five periods (bars) simple moving average (SMA) and the 34 bars simple moving average. But instead of the closing price, the indicator uses the bar midpoint value.
The chart has two bars, usually red and green, with a line running through it. If the latest bar is green that means it is higher than the previous bar and if it is red, then it is lower. The line in the middle is the zero line and when the indicator is above the line, then the market should be bullish and when it is below the market should be bearish. The moment of cross over is seen as the best time to buy or sell. Something to point out, though, is that it should really be used in conjunction with other indicators in order to get a clearer picture.
The Standard Deviation (StdDev/SD) indicator is one of the more straightforward analysis tools that we will be looking at today. This indicator is used to measure the price volatility of an asset, or the difference between the actual closing price and the average price. It takes the form of a line at the bottom of a box.
When the standard deviation is high, meaning that the actual price is further from the average price, it is a sign of higher price volatility. On the other hand, you can see low volatility when the actual price is close to the average price. If there is low volatility, then traders might expect a breakout price spike to take place while, if there is high volatility, then they can expect a decrease in activity level.
Again, the issue with this particular indicator is that it is good at looking at a market’s volatility, rather than examining the price itself. Therefore, if you do want to make a price forecast, then you will need to utilise this in conjunction with another indicator.
The Stochastic RSI indicator consists of a line that moves up and down and helps traders work out if something is overbought or oversold. It was created by Tushar S Chande and Stanley Kroll. The idea behind it was published in the book The New Technical Trader, which came out in 1994. Although there were already indicators that showed whether something was overbought or oversold, the Stochastic RSI was designed to combine the formula used in the Stochastic Oscillator with the values of the Relative Strength Indicator (RSI).
The concept is that, if something is trending upwards, then its close will be close to the intraday high while, if it is trending downwards, its close should be close to the intraday low. The Stochastic RSI measures the size of price differences to see if something is overbought or oversold. One issue with this tool is that it is likely to give false signals if used alone.
Chaikin Money Flow (CMF)
The Chaikin Money Flow (CMF) indicator was created by Mark Chaikin in the 1980s, and is used to measure the money flow volume during a specific period in order to see whether the market is undergoing either buying pressure or selling pressure. The indicator is based on the concept that if the closing price is close to the high, an accumulation is evident, and when the closing price is closer to the low, a distribution occurs. The CMF is commonly used to confirm a trend, measure a trend strength or identify potential trend reversals or breakouts.
The indicator itself shows a moving line around a centre point. When it is above that point, it is an indication of the existence of buying pressure, while there is probably selling pressure when the indicator values are in the negative area. When the CMF line crosses above the zero line while the price continues to move upwards, that serves as a buy signal. Conversely, a sell signal is identified when the Chaikin Money Flow indicator crosses below the zero line with the price moving in a downward direction. It’s worth pointing out that there is the potential for false signals to exist when the price oscillates around the zero line.
The Ichimoku Cloud indicator, or Ichimoku Kinko Hyo, is a versatile "all-in-one" technical analysis indicator incorporating multiple elements represented by different indicators. It was created by the Japanese journalist Goichi Hosoda in the 1930s, but was not published until 1969.
It comprises five lines each representing an overview of the price and a shaded area called the Ichimoku Cloud. If a price is above the cloud, that suggests a rising trend, while if it is below the cloud, then it represents a falling one. If it is inside the cloud, then that indicates a flat market.
On-balance Volume (OBV)
The On-balance Volume (OBV) indicator was founded by Joe Granville in 1963. It is designed to anticipate price changes. The idea is that, if a volume goes down, then the price should also follow, while if it goes up, the price will eventually rise, even if it stays steady for the time being.
If you look at the indicator, you should pay more attention to its movement of travel than its overall score, which suggests whether there is buying or selling pressure in the market. It is worth mentioning that there are some drawbacks with this scheme, such as it not accounting for the actual degree of price movement, or that it needs a longer time frame to work properly.
The Fibonacci Retracement indicator is based around retracements, or periods where a price moves briefly against the trend before going back to the trend. It is based around the numbers in the Fibonacci sequence, whereby each number is the sum of the previous two. The indicator is used by traders as part of a trading strategy because it can help predict potential entry and exit points and whether to buy or sell.
There is a likelihood that prices will reverse toward the trend direction once they reach certain Fibonacci retracement levels in terms of percentages between highs and lows. It is worth pointing out that working out the levels can be subjective, and it can also be hard to tell the initial difference between a regular retracement and a full blown reversal.
These tools can be used to gain a better understanding of what a particular crypto market might do. However, we do need to point out that none of them are fool-proof. Cryptocurrency can behave in very unexpected ways, so do remember that while indicators are very good at telling you what has happened, they can fall down when it comes to telling you what will happen.
It can be useful to use more than one indicator to help your trading but, ultimately, you will need to do your own research. You should also remember that prices can go down as well as up and never invest more money than you can afford to lose.