How to recognize the price ceiling of a digital currency?

Are you one of those people who wait for more profits? But when the price reaches the peak, do you hold hands hoping for more profit, so that the price returns and your profit goes up in smoke and goes away? If your answer is yes, don’t worry! You are not alone; Because many traders fall into this error and lose the opportunity to save profit at the peak of the price by being greedy for more profit.

Determining the price peak is never an easy task. Like most financial instruments, digital currencies also have many ups and downs. No digital asset goes through an upward growth path without frequent crashes. Usually, when the asset experiences a significant growth, it eventually succumbs to oversaturation or a significant change in market sentiment and falls in value.

On paper, traders should buy the asset at the lowest price and sell it at the highest price to make maximum profit; But in practice, less traders can find the best point to exit the position in time. In such a situation, the trader may make a mistake again and hold an asset that has very little chance of growing again after the price falls, hoping to return.

Fortunately, there are many indicators that can help traders identify entry and exit points. In this article, written with the help of a note from the CoinMarketCap website, we review some of these powerful indicators to get a more comprehensive view of the best and most profitable exit points. If you are also looking for more profit from your trades, don’t miss reading this article.

The best indicators to identify the price ceiling

In this section, we take a look at four popular and widely used indicators to identify the price ceiling of Bitcoin. Our particular focus is on the Bitcoin chart; Because Bitcoin’s movements often lead the entire digital currency market, and altcoins usually follow Bitcoin’s ups and downs.

In fact, by identifying the high points of the Bitcoin price, it is easier to find the price ceiling of other altcoins. However, you can use the following suggested methods exclusively to identify the peak price of other digital currencies.

Relative strength index

The relative strength index (RSI) is one of the simple and widely used technical indicators for determining the price floor and ceiling. Working with this indicator is relatively easy and its recognition and calculation is not particularly complicated.

Read more: Training to trade with Stochastic RSI indicator

The RSI Momentum Oscillator tracks the closing prices of a particular asset during a given trading period. We calculate this indicator using three simple elements: 1. relative strength (RS); 2. average profit; 3. average loss

In the formula for calculating the relative strength index, you should consider the average profit of the last 14 days and the average loss of the last 14 days. Relative strength is obtained by dividing the average profit by the average loss. The value of the RSI oscillator can be calculated using the following formula:

Fortunately, most popular trading and analysis platforms automatically calculate the RSI and display it on the price chart.

If the RSI value is calculated above 70, the asset in question is probably in the overbought zone. Accordingly, an RSI value of less than 30 indicates an oversold area; Therefore, if the relative strength indicator shows a large number, it is probably the right time to exit the position. Conversely, a small value of RSI indicates that it is better to think about entering the market.

Since the cryptocurrency market is highly volatile, it is not unlikely that you will frequently see very high or very low numbers on your RSI chart. However, usually if the RSI reading is too high or too low, you should probably wait for a price floor or ceiling to form. Despite this, it is better to combine RSI with other effective indicators and not rely solely on one indicator to make an informed decision.

Pi cycle indicator

The Pi Cycle indicator is a tool for identifying the price ceiling of Bitcoin, which is obtained by examining the relationship between two moving averages of 111 and 350 days. This indicator can identify the points that are associated with the maximum positive emotions of the market and indicate that a downward trend is likely to begin soon.

When the 111-day moving average moves higher and crosses the 350-day moving average line, the indicator provides a strong signal that the Bitcoin price ceiling is likely to form. Historically, we have seen the crossing of these two moving averages at the same time as the price ceilings in the previous cycles of Bitcoin movement.

Therefore, whenever the 111-day moving average crosses the 350-day moving average upwards, it is better to think about exiting the position. However, do not forget to refer to other indicators and check whether other top indicators confirm this result or not.

It is interesting to know that the pi cycle index got its name from the fact that 350 divided by 111 equals 3.153. The result of this division can be considered almost equal to the mathematical constant value of pi (π).

Bitcoin fear and greed index

Fear and Greed Index of digital currencies shows a value from 0 to 100. The number 0 indicates “extreme fear” and the number 100 indicates “extreme greed” in the market. In general, a very low score of the fear and greed index indicates that the asset is close to its price floor; While very high scores indicate price ceilings.

Various factors are involved in calculating market fear and greed index. Various information such as volatility (25%), market momentum (25%), social networks (15%), surveys (15%), market dominance (10%) and market trends (10%) are considered to assess overall market fear and greed. Together, these data form a single score that measures overall market sentiment.

Read more: How to survive the storm of emotions in the crypto market?

Historically, whenever the total value of the digital currency market approaches its peak, this index also reaches its highest level. On the other hand, reaching the lowest value of Bitcoin has often been associated with the lowest level of fear and greed index.

Bitcoin rainbow chart

Bitcoin Rainbow Chart (Bitcoin Rainbow Chart), as the name suggests, is a chart similar to a rainbow. This graph consists of a simple logarithmic regression that plots the evolution of the Bitcoin price over time. The Bitcoin Rainbow Chart puts the historical price of this coin on a colored chart and shows with colored bars whether the price is at its lowest or near the top.

The closer the price gets to the red territory, it means the price is closer to its ceiling and a price bubble may occur. Conversely, the closer the price gets to the blue territory, the closer the price is to the bottom. As you can see in the image below, whenever the price of Bitcoin approaches the orange and red territory, there is a possibility of a quick and strong rebound.

It goes without saying that the Bitcoin rainbow chart was formed using historical data and there is no scientific basis for it; But many traders still use the rainbow chart to predict the future price of Bitcoin.

The rainbow chart can be a useful tool for those looking to determine the best entry and exit points for Bitcoin and other Bitcoin-related digital currencies. It should be noted that this chart is also designed for Ethereum. You can find it by searching for “ethereum rainbow chart”.

Ichimoku Cloud

The Ichimoku Cloud uses several different lines to depict support and resistance. The entire indicator is formed based on these five lines:

• conversion line (Conversion Line(or Tenkensen)Tenkan-sen): Moving average of the previous 9 candles
• baseline (Baseline) or Kijonsen (Kijun-Sen): The moving average of the previous 26 candles
• First leading area (Leading Span A) or Senko (Senkou) first: A moving average of transformation and baseline lines that predicts the future 26 periods.
• Second leading area (Leading Span B) or Senko II: A moving average of the previous 52 candles that predicts the next 26 periods.
• Lagging Span or Chikou: The closing price of the current candle which takes into account the last 26 periods.

As you can see in the image above, the space between the first leading and second leading regions is colored according to which one is higher than the other. When the first leading region is higher than the second leading region, the cloud between them is green and when the second leading region is higher, the middle cloud is red.

The Kumo Cloud is a special feature of the Ichimoku system and the name given to this colorful region. Considering that this cloud uses 26 candles for its calculations, it can have a unique prediction of the price trend.

When the price breaks above this cloud, you get a bullish signal. During uptrends, Como Cloud acts as a support zone; But if the price falls to a range below the cloud, the upward trend may have lost its momentum and the downward trend may begin soon.

When and how to save profit?

If you are also trading with the goal of getting the highest returns, you should be able to correctly recognize the best time to save profits. Although the goal of every trader is to buy at the price floor and sell at the price ceiling, most traders are faced with the problem of determining the most ideal points to exit the market in time and make a profit.

Also, although the above indicators and many other valid indicators can help you determine the price ceiling, it can be mentally difficult to exit the market when buyers are still eager to invest.

In order to successfully overcome these conditions, experienced traders adopt various strategies, some of which are listed below:

• Making minor profits at price milestones: Instead of storing the profit at once and withdrawing the entire capital from the market, it can be divided into different parts and stored little by little along the upward path of the profit. This strategy helps you save some profit every time; But there is still room for you to earn more profit.
• Use of moving stop loss: Stop-loss orders allow you to sell your asset and save the profit if the price breaks below a designated area after an uptrend. A moving loss limit does not consider a fixed area and simply stores profits based on a percentage or a certain dollar amount.

Read more: Trading training using trailing stop

• Save profit with any sudden rise: In the digital currency market, share bullish trends often end in sharp corrections. By selling part of the asset and saving some profit after each exponential rise, you can make some profit and still keep the capital needed for the next uptrend in the market.

Do not settle for one index

If you use indicators separately, you may make mistakes; Because even the most powerful indicators can generate false signals. Therefore, it is better to use a combination of several different indicators and start trading only when several indicators generate similar signals and confirm each other. This approach increases the accuracy of traders to detect price movements and often leads to a more favorable result.

Several ways to combine indicators

To use several different criteria, you can try the following methods:

• Before taking action, it is better to wait until two or more indicators provide similar signals. For example, before you sell an asset to save profits, it is a good idea to wait until the RSI shows a number above 70 and watch the 111-day moving average cross the 350-day moving average on the Pi cycle indicator.
• Another way to be sure of the signal you received is to check an indicator that contains a set of indicators. For example, the fear and greed index combines several different indicators and provides a consolidated score.
• It is better to wait for confirmation and synchronization of momentum and trend oscillators. The combination of RSI and MACD or stochastic indicators can better show the top and bottom of the market.
• Another strategy to ensure the accuracy of the signal is to compare the performance of indicators in short-term, medium-term and long-term timeframes. Using multiple indicators in different timeframes can better predict how long a bullish or bearish trend may last.
• In addition to the presented solutions, it is better to consider the signals of trading volumes and market fluctuations. Excessive trading volume and unusual volatility often indicate the possibility of a price reversal.

If you get a price ceiling signal from several different indicators, especially indicators that use different data and methods, you can be more confident that you have correctly identified the top of the market.

Backtesting price ceiling signals

The last thing that can be done to ensure the correct performance of our indicator or strategy is backtesting. This process involves using different strategies or indicators to examine historical market data. The purpose of backtesting is to evaluate the validity and durability of the target index or strategy.

As a digital currency trader, backtesting tools and methods will come in handy. These methods will help you improve your trading strategy and learn about its possible weaknesses. For example, you can take a backtest from the relative strength index and pi cycle indicators and see when these indicators have been able to provide the most accurate signal in the past.

By examining the price performance in the past market conditions, traders can analyze how and with what precision the various settings and combinations of indicators identify the market’s top and bottom points. For example, the relative strength index can be tested in the range of 65 to 85 to obtain a number that often indicates the optimal level of overbought (peak price).

How to get backtest?

The best way to backtest is to use accurate historical data over long periods of time. If you have enough data, you can easily examine floor and ceiling signals in all past market cycles and evaluate their performance.

Meanwhile, we must mention that to perform the most effective and best backtesting, you must have a realistic simulation of real-world trading conditions. Factors such as price slippage during trading and price difference (spread) and fees should also be included in your test during backtesting to get a more accurate result.

Then, the performance of indicators and strategies can be measured with the help of criteria such as percentage of winning trades, efficiency factor (ratio of total profit to total loss), loss of capital and Sharpe ratio (ratio of profit to risk). The most predictable indicators in different market environments often have a fixed and specific performance.

Read more: Familiarity with 5 risk management strategies in digital currencies

Obviously, past performance cannot fully guarantee future results. However, traders who diligently use backtesting strategies are generally more successful in experimenting with different methods suited to their risk appetite and profit goals. In fact, backtesting along with using indicators can improve your experience and intuition for interpreting signals.

Conclusion

In the digital currency market, which is known for extreme and unpredictable fluctuations, correctly and accurately recognizing the right time to enter and exit the market can be decisive. In the article you read, we introduced methods and strategies that will help you not to lose your profit by recognizing the approximate price ceilings. Five indicators of relative strength index, pi cycle, fear and greed index, rainbow chart and Ichimoku cloud can be a valuable treasure for the best detection of the market peak.

However, you should not forget that these indicators and methods can provide the best results only in combination with each other. Also, we have mentioned some guidelines such as storing trailing profits and using moving loss limits that will help you exit the market with less risk.

In this article, we also emphasized the importance of backtesting and reviewing the historical performance data of other functional indicators. In conclusion, we must remind you that this article is written solely to familiarize you more with a number of methods of detecting price peaks and should not be considered as investment advice in any way. You should research each of these indicators and strategies yourself and never start trading blindly.