Trend is your friend: how to identify trend direction

We continue the series of articles on crypto trading: today our expert will tell you how to identify the direction of the trend using different indicators.

Read the previous article:
Crypto trading basics

Before making a decision to buy cryptocurrency, the first thing you have to do is to define the direction of the trend. This will help to avoid buying at the beginning of a downtrend and save your money and nerves.

The direction of the market can be of three types: uptrend, downtrend and sideways trend. There are several ways to correctly identify it:


EMA lines cross

Trend is your friend: how to identify trend direction

The exponential moving average (EMA) is one of the most popular indicators available to cryptocurrency traders.

A moving average (MA) is calculated by taking the closing prices from a certain number of trading periods, and then dividing the sum by the number of these periods.

An EMA is simply an MA with a different curve that places more weight on recent trading periods. So, EMAs react faster to sudden price changes. An EMA crossover is a trading signal indicating a change in momentum and trend.

I use a crossover of two exponential moving averages with a length of 13 and 21 periods, on a three-day or weekly time frame. Such settings allow you to avoid false trading signals.

The moment when a shorter period EMA crosses over a longer period EMA is a bullish signal, while the opposite is a bearish signal.


Bollinger Bands

The second way to identify the trend is using the Bollinger Bands indicator on the weekly time frame.

Bollinger Bands is a technical analysis tool that measures the current market volatility. The indicator is calculated based on the deviation away from a simple moving average (SMA) of the price. The magnitude of the deviation depends on the volatility, so the bands widen when the market becomes more volatile, and narrow in stable periods.

When the price is above the SMA line, it’s an uptrend. When the price is below the SMA line, it’s a downtrend. The moment when the price is crossing the line is a trading signal for a change of trend.


Ichimoku Cloud

The cross of two lines of the Ichimoku Cloud indicator on a three-day time frame is another convenient way to identify the trend.

Ichimoku Cloud is an indicator that measures future price momentum, and determines areas of future support and resistance. It consists of five lines showing the average price for certain periods of time.

Since the use of the Ichimoku indicator is a whole trading strategy, it is necessary to select the optimal settings. I use these:

These are the main indicators for defining the trend. All of them are quite simple, and their joint use allows you to accurately identify the direction of the trend.

For example, last week we could observe a cross of two lines in a top-down direction on the Ichimoku Cloud, while there was no such crossovers on other indicators. So probably, this was a false signal. But I am more inclined to expect a change in the Bitcoin price trend, from upward to downward.

We’ll check this assumption in a week. If the trend really changes, then we’ll be able to observe similar signals on other indicators too.

Use technical indicators for trading and do not lose money.

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