Recently, I've published an article about the use of indicators in cryptocurrency trading. After that, I published another one about the best 4 indicators you can use. This was a gift from me to you to help guide you in your search for the techniques that will make your account grow. Subsequently, I thought to myself that it's only fitting to follow that up with yet another post about the worst 4 indicators you should avoid when trading cryptocurrencies.
There's a big and ever-growing number of indicators out there. Each follow a different formula to interpret market data.
There are excellent indicators. The ones that give you a win-to-loss ratio of above 65%. There are average indicators, which can only provide a small edge against the market. These indicators are good, too. Because having an indicator that is 55% of the times right is, eventually, profitable. However, there are bad indicators. These are the ones that can't even help you break even and will bring your account to zero in no time. While destroying you psychologically.
What are the worst indicators for cryptocurrency trading?
When searching for indicators to test, usually we start by typing it in the Google search engine. The latter shows a list of websites and YouTube videos. All talking, exclusively, about a dozen of popular indicators.
Although I don't believe that popular should always mean bad, I'm afraid that it's the case here. Otherwise, everyone would've been rich by now. Don't you think?
Still, this won't be my only argument for considering these popular indicators as having a bad performance. The real gauge of an indicator's execution should always be determined by back-testing it. Which is exactly what I did. And boy oh boy do these indicators suck!
The Relative Strength Indicator RSI
Whether it be in FOREX, stocks or cryptocurrency trading, the RSI is, by far, one of the most used indicators. It looks easy to use. It gives signals that seem to have a sound logic. And it looks like magic when you see someone else use it in their trading. However, did it work for you?
No, you say? Well, don't beat yourself up over it. I'm here to tell you why.
The RSI is, in its core, a momentum indicator. Which means that it's supposed to represent the speed and "weight" of price movements. It was developed in 1978, while the cryptocurrency market wasn't developed until around 2009 with the creation of the first cryptocurrency, Bitcoin. That's a difference of 31 years. Or, over three decades. Which makes the RSI embarrassingly outdated.
Moreover, the RSI is one of the simplest to use indicators. This helps inflate its appeal.
It goes like this:
The RSI gives a signal to sell when the cryptocurrency becomes overbought. Or, when the RSI goes over the 70 level. Conversely, the indicator gives a signal to buy when the cryptocurrency becomes oversold. Or, when the RSI plunges under 30.
Easy as pie. right?
It's basically a money printing machine!
No! Not even close. Have a look on this chart.
When the RSI went above 70, it was supposed to be a signal to sell. But as you can see, the price didn't go down. It just kept going up. Even after the second signal. The price just kept hiking. This would've been catastrophic for your account.
So, Although the RSI is assumed to help in identifying price corrections or reversals, it does a bad job at it.
The Bollinger Bands BB
Bollinger Bands are a three-part indicator composed of two envelopes plotted above and below the line of the simple moving average SMA.
Like the RSI, the Bollinger Bands indicator tells you if the price is too high or too low. This happens as the price starts testing the limits of the envelopes, as shown on the Bitcoin price chart above.
In other words, it indicates whether the cryptocurrency is overbought or oversold. Again!
Yet, how could you tell when it's time to execute your trade? How would you know the exact moment the price is going to reverse course? It could go up and stay in the overbought territory for a long time. Remember:
“The market can remain irrational longer than you can remain solvent.”
John Maynard Keynes.
Trend Lines
Trend lines are like diagonal support and resistance levels. If the trend is going up, trend lines connect higher highs together, as well as higher lows. If the trend is going down, they connect lower highs together, as well as lower lows.
The main drawback of trend lines is that they lack consistency. Every one of us can draw them differently on the same chart.
So, which are the true trend lines? No argument is strong enough to make us pick some trend lines over others. This makes it impossible to know for sure when to enter a trade, or when to exit.
On top of that, if one of your goals of implementing indicators in your trading was to gain confidence and be disciplined about it, you can kiss that goodbye. It will wreck you emotionally. Because you're not one step closer to your goal by working with something that is not uniform.
Psychological Levels
Finally, enter the psychological levels. A place where no logic exists.
In principle, a psychological level is a price that is easy to remember. It's considered as a type of support and resistance indicator.
Presumably, it can affect the price of a cryptocurrency just by the fact that it's there. Which is preposterous.
Why would it? How many times did the price really react to that specific level? And if it did, was it really because of the reaction of market players to that number?
Nobody can tell.
Add in the fact that there are many price levels circulating among traders. Some use the 00 levels. Some prefer the 500 levels. Others combine them both and can even add all sorts of levels in between to justify their biases.
This should be enough to persuade you to invest your time in searching for a better indicator that doesn't rely on such frail assumptions.
Conclusion
To conclude, there are tons and tons of indicator on the internet that you can download for free. While conducting your research for indicators to use in cryptocurrency trading don't limit yourself to typing common keywords. Go deeper. There's the mql5 Code Base and it's a beautiful place where you can start your search.
I know it can be intimidating. Getting in this vast sea of indicators without any directions to follow. However, you can just start somewhere.
You can't wish to become successful while evading doing the hard work. Nobody can tell you what's the best indicator for you beside yourself.
This is why I don't want you to take what you found out in this article as financial advice. At the end of the day you're the only one responsible for your own trading decisions.
Most important of all, never work with an indicator that you didn't back-test yourself.
Be careful!
Here are the two previous related posts:
Cryptocurrency Trading: How to Use Indicators to Maximize Profits?
The Best 4 Indicators for Crypto Trading
