Top Tools for Crypto Trading

Last Updated July 23rd 2021

7 Min Read

Crypto trading is popular these days. However, a crypto trader should exercise due diligence and research. If you are a crypto trader, you can make use of trading tools for better trading. Crypto trading tools are designed to make crypto trading easy. They also help you to find opportunities you might not be able to find on your own. Just like you will not go into a battle unarmed, you should not get into crypto trading without any preparation or tools.

Why Use Trading Tools?

Trading tools help traders make informed decision and capitalise on opportunities that come their way. Experienced traders extensively use some sort of trading tool to get the best out of their trading.

Trading tools help you to identify an asset trend. This will help you to create your own entry and exit points. You can generate and confirm your buy and sell signals with the help of trading tools such as technical analysis. Advance charting helps to get a clear picture of the market.

A key trading tool is the economic calendar, which helps a trader to understand the upcoming key events and economic indicators and their impact on various markets. Likewise, news can also be a trading tool to understand the drivers that move asset prices. This is an incredibly useful tool, especially for crypto traders. News headlines are one of the most significant movers of Cryptos.

Technical analysts have an extensive catalogue of tools at their disposal. All these tools provide some information – it could be a price direction, trend strength, setback, trend speed, and so on. However, a trader need not use all these tools for effective trading. Few of the tools mentioned below are sufficient to achieve good results.

Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.

Here are some of the top crypto tools you can use for effective trading:

MACD (Moving Average Convergence/ Divergence)
DMI (Directional Movement Index)
Moving Averages
Support and Resistance
Trendlines

Let us now consider them in detail.

The MACD

The Moving Average Divergence/Convergence is one of the most traditional indicators in the world of technical analysis. It is an indicator that uses a combination of two measures on the price and disrupts them in an open range (Oscillator) with a middle reference point. The advantage of this oscillator is its simplicity and its reliability in following certain behaviour patterns. Due to its distinct behaviour patterns and reliability, it is used widely by traders everywhere.

Some of the behaviour patterns of the MACD are:

MACD failure

It is a behavioural pattern where statistically, the first attempt to cut a slow measure by a fast measure typically fails to result in the attempt being rejected. Hence, statistically speaking, if you take positions after the first rejected attempt, you have a much better chance of entering at the right time.

MACD Divergences

This is a pattern of behaviour where after a relative maximum or minimum level in both price and level is reached by the MACD, a new relative maximum or minimum occurs in the price. It is not accompanied by the MACD. Statistically, this pattern generally precedes a market floor or ceiling, even though the divergence situation can last for a quite long period.

DMI (Directional Movement Index)

This is another preferred indicator. The DMI is constructed by plotting the DI+ or positive directional index and the DI- or negative directional index in the same space. The reading is then used to build a third component, which is called the ADX or Average Directional Index. So, DMI gives a wholesome view of the trend strength.

It is particularly useful because it draws three different lines. The D+ line indicates the level of activity of the bulls during each period. The D- indicates the level of activity of the bears during the specified period. Furthermore, the ADX indicator informs you about the level of trend strength in the market.

Like the MACD, the DMI indicator has highly marked patterns and offers exceptionally reliable statistics. In short, it is an excellent tool for those looking for some help in crypto trading.

The behaviour patterns of the DMI are:

Crossing D+ D-

The crossing of both components of the DMI follows a pattern. This is a helpful tool because statistically, after a long series of periods without any crossing, the first crossing to occur will be quickly reversed. After this first rejection, a second cut is generally statistically more reliable.

Crossing Ds with the ADX

This cross occurs when one of the two components (D+ or D-) is above or below the ADX line and crosses the indicator. It will either be above (coming from below) or below (coming from above). The point at which the component (D+ or D-) crosses the downward or upward ADX line is vital. It should be considered as a position opening signal, which would be validated by a break in the trend line, support, or resistance.

ADX Re-test

If there is a cut to the bottom of the ADX line, then this behaviour pattern tells us that the component (D+ or D-) will try again to pass the ADX line. Statistically, it will fail. So, the point at which the component (D+ or D-) touches below with the ADX line will give you the position opening signal.

Set of Moving Averages

The set of moving averages such as the SMA100, the SMA200, and the EMA50, should be analysed as a whole. They not only offer points of support and resistance but also give you a lot of information to analyse in totality.

You should ask questions such as - are fast averages higher or lower than the slow averages? Is the price over or under these averages? Your answer to these two questions will greatly help you to understand the market environment at any point in time.

Don't Miss: 7 Reasons to Invest and Trade in Cryptocurrency

Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.

Levels of Support and Resistance

Establishing a trading strategy involves proper detection of price levels where the spot price will find it difficult to move. Finding this is important while setting up a trading strategy. To define these price levels, you can use graphic representation.

You can focus on all period types. However, it would be better to focus on a selected few such as monthly, weekly, daily, and hourly (once every three hours or so). You can then analyse with all the available time depth.

Starting with the broadest timeframe, which is the monthly one, you can mark price levels where you see more closures or openings of the asset you are tracking. You must take all the factors such as the price queues, maximums, and minimums into account. Once you finish the search on the monthly range, repeat the same with weekly, daily, and hourly ranges.

Once you do a thorough analysis of the time depth, you will get a clearer picture and can make your decisions accordingly. You can choose a time frame that suits your need.

Trendlines

Trendlines are valid tools for both technical analysis and trading. They are the authentic validators of any scenario that may arise. In the case of support and resistance lines, the effectiveness and validation capacity of trendlines are similar.

It is indeed tricky to decide on where and how to draw a trendline. Some traders choose to pull the lines from the absolute minimums. However, some others always prefer to draw the trendlines from the bodies of the asset – that is, from the points of opening or closing.

You should remember that when you draw from these points, the trendline is much closer to the price and hence, false breaks are a common scenario. You should always strive to validate the breaks with other components in your system. Otherwise, you will end up making wrong decisions.

Only a confirmed break of a trend line or horizontal support or resistance and understanding it as a confirmed break with the closing will allow you to take a scenario as valid.

Alternatively, you can use a third option, which is largely valid for analysis but not very suitable for trading. This is to draw trendlines at the point where most closures and openings accumulate. This way, you will be able to find guiding trendlines on which the price pivots and where it ends up returning if the scenario that justified them remains valid.

Check Out: How to Identify Cryptocurrency Market Trends

Which Tool To Use?

There is no single tool you can use at all times and during all scenarios. The best practice would be to use a combination of these tools according to the situation. Most traders will have a favourite that they are comfortable with and rely heavily upon. You will have to use these different tools in conjunction and find which combination works best for you.

There is no hard and fast rule stating you should use so and so tool for maximum efficiency. It all depends on your choice and personal preference, along with the results they give you when you use them. With a few trials and errors, you will soon discover which one works best for you and how you can make the best out of it. Do not hesitate to use any tool just because you have not used it before. As you know the benefits of these tools, it will give your trade the necessary impetus if you use the tools to trade in crypto.