Abstract：If you've studied every article in WikiBit on cryptocurrency trading, you should now be aware of two major distinctions. As an investor, I take long-term positions based on fundamentals, and as a trader, I make short-term decisions based on technical analysis in order to profit from crypto's price volatility.
Volatility is a term that refers to a state of
Recognize Moving Averages
What is the Relative Strength Index (RSI)？
If you've studied every article in Learncrypto's section on cryptocurrency trading, you should now be aware of two major distinctions. As an investor, I take long-term positions based on fundamentals, and as a trader, I make short-term decisions based on technical analysis in order to profit from crypto's price volatility.
Technical analysis necessitates the interpretation of price and volume change. So far, we've looked at the fundamentals of price creation, such as where it comes from, the role of exchanges, and the types of basic data that are provided as part of the process.
This led to a study of the most basic tool for price analysis, the price chart, using candlesticks and volume measures.
This layering of data allows you to look at price history as a tale and try to decipher the patterns and signals to figure out where the story will go next.
These fundamental instruments, on their own, cannot tell you the entire price narrative or provide enough data to forecast future prices, which is, after all, your goal.
The next step is to begin adding indicators to your trading toolkit in order to properly quantify price movement, which requires a thorough understanding of volatility.
Volatility can be measured in a variety of ways.
Volatility, to use bitcoin as an example, is the amount by which its price fluctuates up and down.
Volatility is what defines how much risk you're willing to take in order to execute a profitable trade.
Looking at a daily bitcoin chart by eye, you'll notice peaks and troughs that resemble a seismograph, which is a good analogy. Each movement is a reaction to the number of buyers and sellers, similar to how a seismograph depicts tectonic activity.
The standard deviation of daily percent fluctuations is the exact definition of price volatility. In basic terms, how much does the price differ from the average on a daily basis？
Though understanding how to assess Bitcoin volatility is vital, measures are readily available online; here's one example for 2020.
The Volatility Index hovered between 2 and 4% for the bulk of the year, with a large surge in March/April, when it reached above 10%.
Returning to our earthquake analogy, this is a magnitude 9 earthquake, a huge occurrence. This was in response to Covid19's impact on the larger financial markets.
A Volatility Index of more than 10% denotes theoretical returns of that magnitude for daily trades during that time period. Gold has a volatility of roughly 1.2 percent, whereas other major currencies have a volatility of between 0.5 and 1.0 percent.
Volatility can be even higher when looking at a shorter time period, because it is only an average, which indicates that the risks of trading can be higher on some days.
Although the seismic event of Covid19 is nearly impossible to forecast, market shocks of this magnitude must be expected. If you decide to trade on a regular basis, you should expect large swings in both directions on some days.
Because volatility is calculated by examining the variation in the average bitcoin price, charts allow you to automatically plot moving averages over standard periods and overlay the current price.
One of the basic indicators in the technical analysis toolset is the moving average. They simply provide you the ability to see today's price in a larger context. The more valuable the conclusion, the longer the moving average timescale.
Averages of Moving Averages
A Moving Average is just the average price over a set period of time that changes over time. An example is the greatest way to grasp it.
Bitcoin's seven-day moving average takes the average of the previous seven days' price and updates it over time. The moving average will be plotted alongside the actual price movement on a price chart.
Moving averages are generated at shorter intervals of five or seven days, then at greater intervals of up to 200 days. Shorter-term moving averages are popular for technical analysis, whereas longer-term MAs are preferred for fundamental study.
Moving averages are important as resistance level indicators, effectively signaling expected price floors or ceilings based on the overall view they provide of price.
The slope of a Moving Average can be a significant indicator of market direction; as it steepens, it indicates price momentum, whilst a flattening MA could signal oncoming negative conditions.
On March 16th, 2021, the price chart below plots three moving averages against price over a seven-day period.
· The cost is indicated in blue.
· The 7-Day Moving Average is shown in yellow.
· The 20-Day Moving Average is highlighted in orange.
· The red line represents the 100-day moving average.
Price and the short-term Moving Averages are nearly in sync on the chart, but the longer-term 100-day MA is below them, implying that price was ready for the correction that occurred on March 15th, bringing all of these indications into alignment.
Where the Moving Averages intersect, some of the most powerful signs emerge:
· It's bearish when a shorter Moving Average falls below a longer one.
· It's bullish when a shorter Moving Average rises over a longer one.
· The Death Cross occurs when the 50-day moving average goes below the 200-day moving average.
Bitcoin's Monthly Close has never gone below the 200 week Moving Average, which was originally measured when Bitcoin was 200 weeks old, according to a commonly claimed statistic.
The 200 WMA appears to rise in lockstep, and given the length of time it is measured over, it smooths out all of the volatility in that time period, indicating Bitcoin's success as a store of value.
When used in conjunction with Cost Averaging, Moving Averages provide a mechanism to reduce or raise frequent purchases based on the slope of the 200-day Moving Average.
Moving Averages, like all Technical Indicators, have several levels of intricacy. Greater complicated forms, such as Exponential Moving Averages (which give more weight to more recent data) and Moving Average Convergence Divergence (MACD), which quantifies the connection between two moving averages, are commonly used by experienced traders.
The Relative Strength Index is another prominent technical indicator that works in a similar way to Moving Averages.
The Relative Strength Index (RSI) is a measure of how strong (RSI)
The Relative Strength Index, or RSI, is a useful tool for determining if a cryptocurrency is overbought - overvalued - or oversold - undervalued.
It's referred to as an Oscillating Index since it returns a number between 0 and 100. An RSI number greater than 70 indicates overbought conditions, whilst a value less than 30 indicates that a coin is undervalued due to heavy selling.
The RSI calculation is straightforward, just comparing days when the price rises against days when it falls. This formula is used to calculate it:
RSI = 100 – 100 / (1 + RS)
RS is the average price increase over 14 unit periods minus the average price drop over the same period. A day or an hour might be considered a unit.
In this way, the RSI is a measure of market momentum, but if it were as simple as waiting for the RSI to reach 70 or 30, and then selling or buying appropriately, we'd all be very wealthy.
On March 16th, 2021, an example RSI seven-day chart for BTC/USD is shown below.
· Take note of how the linear pricing is displayed in the top pane.
· The key thresholds of 70 and 30 are plotted in the RSI pane below.
· RSI correlates relatively closely to price, and its highest point of 74 on March 14th acts as a leading indicator for the subsequent price drop.
Because other contributing elements might support overbought and oversold conditions, RSI should not be depended on in isolation.
It's what's known as a Leading Indicator, which predicts where price is likely to go next.
Moving Averages are a type of Lagging Indicator that shows a historical pattern or confirms a trend.
The next article in this section on how to trade bitcoin will go deeper into leading and lagging indicators, as well as information related to the operation of cryptocurrencies and the wider ecosystem that can help traders make better decisions.
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