Relying on indicators in your crypto trading is a good add-on to your trading strategy. It helps in keeping emotions out of your trading. Thus, giving it a strong structure. Especially when you combine only your best indicators together. The results can be pleasantly surprising. Which raises two main questions. First, what are the best indicators for crypto trading? Second, how to combine them in order to have the best possible results?
This is why, today, I'm going to present to you 4 of the best indicators that I have back-tested myself. In addition to how you can put them together to eliminate as many losses from your trades as possible.
How I back-test indicators?
When I'm back-testing indicators I always make sure to follow certain rules. I start by choosing a cryptocurrency pair. I prefer picking cryptocurrencies that are highly volatile and assess the indicators performance on them. If they work well in this situation, they usually perform even better on less volatile crypto-assets.
Then, I take only the indicators that made it through this first phase and plot them on a less volatile cryptocurrency. The one that I intend to keep in my portfolio.
I use candlestick charts on MT4. This allows for a better and smoother experience when back-testing.
My initial step is to back-test the confirmation indicator first. After that, I add to it a baseline that works with it. Once I find two that complement each other, I add a second confirmation indicator.
At this stage my main objective is to take away some of the losses generated by the confirmation indicator. Finally, I incorporate another indicator that will tell me when to exit.
To enter a trade, all of the indicators I'm using must agree together. If all of them are telling me to buy the cryptocurrency and only one is telling me to sell, or is a bit late, I don't take the trade.
To know where I can put take-profit levels, along with where my stop-loss levels will be, I use volatility indicators. Because they give me a number that I can combine with my risk-to-reward ratio to come up with an effective risk management strategy.
If you're interested in discovering more about this methodology, you can check out my article about cryptocurrency trading and how to use indicators to maximize profits.
The best 4 indicators you can use for crypto trading
The Kijun-Sen indicator
The Kijun-Sen indicator is but one of the components of the Ichimoku Kinko Hyo indicator. It serves as a baseline to trading cryptocurrencies because it indicates the midpoint price over a certain past period. Which makes it a good standard for gauging short- to medium-term price momentum.
The Average True Range ATR Indicator
The ATR is an indicator that comes with the MT4 trading platform. It's a volatility indicator that reveals how much a crypto asset has moved, on average, during a given past time frame.
As you can see on this Bitcoin price chart, periods of high volatility are coupled with big and erratic price movements. However, when the ATR values start going down, price follows by becoming more stable and less unpredictable.
Including the ATR indicator in your crypto trading will let you have a better risk management strategy. The key to using it correctly is knowing that you can fix your risk-to-reward ratio according to the values it shows.
The Absolute Strength Histogram ASH Indicator
The ASH indicator's main purpose is to identify current trends. It also does a wonderful job at filtering signals. Therefore, it can serve as a confirmation indicator, or a second confirmation indicator.
The signals generated by the Absolute Strength Histogram must not be taken on face value. Even with the baseline to help identify the trend, it still can generate wrong signals. This problem can be solved with a second confirmation indicator that will, hopefully, take away the losses.
The Relative Vigor Index RVI
Like the ATR, the RVI indicator is in the MT4 platform by default. Usually, it's used as a momentum indicator that measures the strength of a trend. However, we can also make use of it as an exit indicator along with the baseline, the confirmation indicator and the second confirmation indicator.
I chose these 4 indicators based on their performance over the period of two years. Combined and tweaked to certain values, they give an average win-loss ratio of 65%. If they are put together with a good money management and risk management strategies, they provide very good returns.
Indicators can add layers of protection when you're trading on the cryptocurrency market. They can also work on any timeframe. On top of that, they can give pretty impressive win ratios when they're rightly tuned. Nevertheless, they shouldn't be the only thing you rely on. Fundamental analysis is also a key component of every successful trading strategy.
Disclaimer: This article is to help guide you in doing your research. It is not to be taken as financial advice. You're the only one responsible for your own trading decisions. Please do your own back-testing before taking on any trade. Otherwise, you risk losing your money. Trade safely.
